Many companies in the APAC region have been making significant revenue from China, and as the RMB has been appreciating over the last five years, there has been little interest in hedging. However the recent 3% drop in the RMB against the USD has caused many trading companies, which work on tight profit margins, as well as those active in commodities, to re-examine their hedging strategy for the Chinese market. There is likely to be new priorities as companies with RMB revenues and USD costs almost certainly seek better hedging strategies, better hedge accounting and better exposure visibility. Treasurers therefore should examine the benefits of early adopting IFRS 9 to achieve a better accounting outcome especially when hedging commodity risk, cross currency debt or using option strategies.
What’s more, APAC companies have been taking advantage of the lower USD interest rates and the appreciating RMB to borrow in USD. But now, corporates are starting to fund their operations onshore in China, which wasn’t the case before. Next year, APAC treasurers will need to look at the market to determine where it makes sense to locate their funding activities. Related to this, CFO’s will be demanding a reduction in interest expense. Treasurers should look at intercompany lending and evolving in-house bank techniques to better manage interest expense.
Elsewhere, we have already seen evidence of corporates moving their regional treasury centres to Shanghai, closer to the revenue source and as The Hong Kong government budget includes a plan to attract more regional treasury centres and as many Chinese corporates as possible, because of its tax efficiency, freely exchangeable currency, and less regulated market. Companies planning to create a centralised treasury next year will be seriously considering Hong Kong as an alternative to Singapore and even Shanghai.
In terms of liquidity and risk management considerations for the upcoming year, the current uncertainties about Chinese growth (2.5% versus 7% officially) will cause companies to take a close look at their liquidity resources, and to consider treasury technology to better identify FX exposures, improve cash forecasting, perform hedging operations and use hedge accounting to protect against greater P&L volatility. Improved risk management tools will be needed to deal with any crisis in China. These include simulations, what-if scenarios, sensitivity analysis and cash flow at risk. Better decisions will require analysis of complex situations, such as the relationship between commodity prices, the USD/RMB and other regional currencies such as AUD or JPY. Many organisations in the region are still cash rich (insurance companies, for instance), and low local interest rates and euro weakness may encourage M&A activity in Europe. Take Li Ka-shing, Asia’s richest man, for instance, who started to sell off his China assets last April due to his negative outlook on the China economy and property market and is now redeploying assets to Europe.
Finally, the drivers of TMS projects in APAC are presently liquidity and working capital management, and counterparty exposure management. The renewed volatility will see currency and interest rate risk management as drivers of treasury and risk management projects. As a consequence of organic growth and M&A activity, RFPs are asking for cloud platforms to support geographical growth as historical concerns in the region are now mitigated. Cloud solutions are increasingly seen to have an attractive price point, and add value because they outsource maintenance and disaster recovery, and do not require a big team for support. These factors are also enabling more and more mid-sized companies to seek cloud solutions for their treasury operations.