Angela Hao explains her role as China Treasurer. She highlights the difficulties in managing cash in China and explains how a presence in the country can help to overcome problems.

What is treasury’s role in HP China?

There are four main strands within global treasury – Consulting and Services, Risk Management, Corporate Finance, Financial Risk Management and Global Benefit Administration. As part of a re-engineering of the treasury department, where we aimed to centralise treasury expertises and operations, we have established three regional hubs or treasury service centres. The countries in the Asia-Pacific region report into the Singapore centre.

At present, China is an exception to that rule. Because of the uniqueness of the China environment and the fact that HP has targeted China as one of the key strategically high growth areas, we decided we need to have treasury expertise present in China. In effect, there are two aspects to the China treasury. The first, back office work such as moving cash, we have managed to centralise to the service centre in Singapore. My role in China is focused on consulting.

Three and half headcounts work on China-related issues. Of these, one and half have responsibilities for operational issues, with the rest focusing on consulting and other high level country specific issues.

What are you responsible for?

My responsibilities can be divided into five main areas:

1. Cash and liquidity management consulting and FX exposure reporting.

   Although daily cash movements are managed in the Singapore Service Centre, China’s complex regulatory environment makes that difficult. By working with our businesses and the Government, I can provide consulting advice to Singapore to ease this process. We also generate foreign exchange forecasts for the team in Palo Alto which manages the execution of all hedging activities.

2. Government and banking relationship management.

   China remains a highly regulated environment especially in the foreign exchange control area. The regulations are complex and changing rapidly and can affect our ability to execute our strategy. One important aspect of my role is to understand the implications of these regulations and then to have timely and effective communications with related governmental bodies on those issues affecting the company and to make recommendations on how to shape the regulatory structure and environment into the future. On the banking side, my role is to ensure the fulfilment of global banking relationship policies and guidelines. I serve as the central interface between banks and internal HP businesses when such needs arise for the engagement of any banking services and/or solutions.

3. HP China finance leadership council.

   Treasury is a key member of this internal body. We work with our colleagues from the Controllership, Tax and Legal departments and the business units to discuss and reach decisions on initiatives that have major impacts on our establishment in China.

4. Business planning and business development consulting.

   HP has a very aggressive business development strategy. We aim to move from the number three IT company in China (by investment and market share) in 2003 to number one by 2008. Treasury can support the business to achieve these objectives.

5. Consultation for other infrastructure organisations.

   This can include helping businesses select the right bank to support process re-engineering. For example, as part of the global initiative to centralise accounts payable to the processing hub, we helped the processing organisation to identify the appropriate banking solutions and were actively involved in issue resolution during the implementation.

Can you give an example of how you work with other internal functions?

We work closely with the credit and collection departments on strategic issues. For example, in 2005, HP will be embarking on a global strategy to improve working capital management. On the one hand, we want to collect accounts receivables as soon as possible to control DSO and reduce counterparty risk. On the other, we have to balance the risk factors with the financial impact on the company overall. We need to determine a strategy of how to optimise the company’s overall benefit while enabling each internal party to achieve its individual objective.

How do you manage cash within the group?

Within China, we manage cash on an entity by entity basis. We use the global treasury standard bank account structure. This is a triangulation structure based on three basic bank accounts, one each for accounts payable, accounts receivable and treasury. When cash is collected by accounts receivable, it is swept into the treasury account. This funds the accounts payable account whenever they need to pay vendors or other parties.

Any cross-entity funding, including physical cash pooling, needs to be managed through an entrustment loan structure set up by a bank as the intermediary. This is because the Government distinguishes between financial and nonfinancial institutions, with only financial institutions permitted to engage in financing activities. Because our entities are not defined as financial, they are not permitted to operate financing activities independently.

At present, all entities are cash rich, which means we do not normally need cross-entity funding. However, in some cases, cash may be sitting with one entity in the wrong currency. For example, an entity in the Free Trade Zone may have balances in Renminbi, but be short in US Dollars.

Today, we are in the process of setting up a ‘quasi’ cash pooling structure in Renminbi and US Dollars. This structure is still backed by an entrustment loan scheme, whereby a master agreement that includes all HP participating entities needs to be reached with a bank as the intermediary or entrustee.

What do you do with any surplus cash?

Our first priority is for China to participate in the global liquidity model. Cash repatriation is very important, but there are limitations in the way that we can achieve it. Of the three main options, two, paying an annual dividend or monthly royalties, are fairly standard and simply need to be managed carefully. The third, creating a quarterly US Dollar cross-border inter-company entrustment loan, is based on a pilot programme granted by the Government in 2003. New regulations were published in November 2004 to ease the process and allow more qualifying entities to operate direct overseas lending, although the legislation is yet to be fully implemented.

Any excess cash remaining in China is then centrally managed by treasury, usually in time deposits and a few other yield enhancement alternatives. Overall, HP has a fairly conservative investment policy.

What criteria are important when you appoint banks?

We have five main sets of criteria:

1. Credit management.

   The worldwide credit limit is based on each bank’s rating. This is then allocated down to a region or country.

2. Global reach and relationship.

   Globalisation, standardisation and automation are all important for HP. We are keen to avoid country specific solutions, unless they are justified as necessary.

3. Mindset and service/product offerings.

   These are related to the capabilities of the bank. We will always look to work with, and award business to, banks with the best product offerings and the ones we think can develop with us.

4. Business realities.

   Although the banking industry is developing and expanding quickly, certain banks do have advantages over others. In particular, some of them have a track record of working with the Government and benefit from better communication and better bargaining power than their competitors. Some banks also have wider and more established domestic branch coverage.

5. Implications of WTO (World Trade Organisation) entry and trend in future financial markets.

   We are also mindful of future trends. We do not want to implement a solution which will quickly become outdated.

We have a wide portfolio of banks that includes major international banks and selected main domestic banks.

How do you manage your banking relationships?

We comply with, and support, the HP global banking relationship policy and guidelines. Within the policy and guideline boundaries, we view our banks not only as service providers, but more importantly, as strong business partners. We work closely with them to keep abreast of updates both on the state of the market and on Government policy changes.

For example, we work closely with our relationship managers to keep them updated on what we are doing and seek their help with, and advice on, any issues/problems we face. In some cases, because of the work they are already doing with other companies, they will be able to identify a solution fairly quickly. In other cases, they may serve as our extended arms to constantly explore and pursue solutions. When solutions involve governmental agencies, it is notably more effective if the proposals have already been thought through and blessed from both corporate and banking perspectives to enhance their feasibility. So again it is in our interests to cooperate with the banks.

Finally, while significant improvements have been made over the years, certain banks, especially local banks, still tend to be very decentralised, resulting in different approaches by different branches in the same bank. As we like to develop national solutions, we have to work at both branch level and with the bank headquarters to ensure buyin and support at all levels so a consistent approach can be applied. So far, although we have enlisted the support of our national relationship managers to act as internal facilitators within the banks, the role needs to be further enhanced.

What do you consider to be your next challenges?

Firstly, we want to enhance our entity structure. This will allow us to achieve efficiencies when interfacing with customers and the Government; and in operational and cash management processes.

Secondly, we will continue to consolidate key operational processes, such as accounts payable and payroll, into the regional hubs. In addition, the working capital management initiative will be complex, but strategically important to pursue.

Thirdly, we need to continue to engage Government and banks proactively so they can understand and support HP’s business needs. There may well be a timing gap between the development of new regulations and the speed at which HP wants to grow. We will have to bridge that gap.

Fourthly, we need to continue to educate business units about the role of treasury. Treasury is still a new discipline in China. We need to make sure when business units are planning new initiatives, they involve treasury from the beginning to avoid any hiccups with foreign exchange controls down the road.

Last but not least, we will conduct thorough feasibility studies of the company’s business model and how well it will flourish in the existing country environment. While China’s regulatory environment is undergoing significant improvements in its compliance with the global standards, the changes take time and require adjustments along the way. When introducing new models or processes into China, it is crucial to build a solid foundation that is not only executable under the current regulatory environment, but also coincides with its future developmental direction and timeline.