Regional Focus

China: in the fast lane

Published: Mar 2013

According to a Chinese proverb, in every crisis there is an opportunity. As economies worldwide continue to struggle following the global financial crisis, China itself has become the opportunity.

Reuters has estimated that in January this year exports from China grew 25% from a year earlier – higher than Reuters’ forecast of 17%. A trade surplus of $29.2 billion was higher than market expectations of $22 billion. New lending by banks in the country totalled $172 billion, more than double the amount recorded in December 2012.

HSBC’s services purchasing managers index (PMI) for China hit 54 points in January, up from 51.7 in December. Nearly a third of the firms the bank surveyed said they expected business to expand in the coming year. HSBC calculates that the services sector contributes 46% to China’s GDP and is now equal to that of the manufacturing industry.

Official PMI figures from China’s National Bureau of Statistics recorded a modest increase in non-manufacturing PMI of 0.1% in January, compared with the previous month. Broken down into specific industries, the figures found the construction industry PMI was 61.6% (a decline of 0.3% on December) and that the services PMI was 54.9%, up by 0.2%. Within that figure, retail trade, air and water transport remained above 60%, while declines were recorded in the hotel services, ecological protection, environmental management and public facilities administration, real estate and residential services industries. The manufacturing PMI for January was 50.4%, down by 0.2% on the previous month but above the 50% threshold that indicates growth.

Commentators have warned that statistics for January have been skewed by the reduction in working days for January last year because of the Lunar New Year holidays. But compared to developed nations, China still presents a strong economic picture.

In its Global Economic Prospects report, published in January, the World Bank noted that developing countries had recorded among their slowest economic growth rates of the past decade during 2012, partly because of the euro zone uncertainty. However, as the institution’s President, Jim Yong Kim pointed out, developing countries have remained “remarkably resilient” during a global economic recovery that remains fragile and uncertain.

China’s economy slowed to an estimated 7.9% in 2012 from 9.3% in 2011, its weakest rate since 1999, says the World Bank. Exports from the region contracted by 8% in the three months to September and caused industrial production growth to slow to 3-4% in 2Q12. Global growth during the same period, says the World Bank grew 2.3% and is expected to remain broadly unchanged at 2.4% in 2013. China’s growth will accelerate to 8.4% in 2013 before stabilising at about 8% in 2014 and 2015 as the economy re-orients toward domestic demand and services, the report says.

According to the World Bank, in 2011 China’s GDP was $7.318 trillion, generated by a population of 1.344 billion. The future of the country is promising, particularly with regard to development indicators. For example, the country outpaces its East Asia and Pacific (developing) neighbours in terms of life expectancy (73) and primary school enrolment (111% – which takes into account over or under-aged students). Between 1996 and 2004, the percentage of the population living on the national poverty line was reduced from 6% to 2.8%. (India, another engine of economic growth in the developing world, has 29.8% poverty levels and lower life expectancy, but matches China in terms of school enrolment.)

While China is closely watched, it is often misunderstood. In January, Qu Hongbin and Julia Wang, Economists at HSBC in Hong Kong, published a paper tackling what they termed as ‘two myths’ of the Chinese economy. “Myth one: China is export-reliant. Wrong. Conventional trade statistics overstate the economy’s exports dependence. Myth two: China is losing export competitiveness. Wrong again. China is still gaining global market share,” says the report.

The HSBC economists argue that China often acts only as the final assembler of parts and components made elsewhere. Citing the OECD’s Trade in Value database, they write that exports contribute 18% to China’s GDP, once exports with no domestic value added are stripped out of the figures. China’s economy is far less reliant on exports than it appears at first glance, says HSBC.

The resilience of China’s export market is attributed to two factors: low cost producers continue to benefit from economies of scale and quality differentiation; and China is becoming more competitive in higher value-added goods.

“Global demand will likely remain weak for a few more years and dampen export growth in the short term,” says the report. “But beyond the current downturn, China has the potential to continue expanding its share of global exports given that it has 20% of the global labour force but still accounts for just 10% of global exports. This potential should be unlocked, as industrialisation and urbanisation in China’s inland provinces picks up. As more inland cities become linked to the world market, they should further China’s market share gains in global trade.”

While international trade has slowed since 2008, the report’s authors state that Chinese producers are gaining a bigger share of global exports than in the past and are positioning to gain even more market share when global trade eventually recovers. The same goes for China’s economy: “China’s current share of global exports at 10% is only half the level of its share of global labour force. The recent urbanisation push will help the economy unlock this potential. With transport and logistics in place, inland cities will replace coastal areas as China’s new export engines. The positive spill-over from production to consumption will boost imports too,” says the report.

China’s rapid urbanisation is another factor often misinterpreted. So-called ‘ghost cities’ are cited as evidence that China’s economy is over-heating and will collapse. However, commentators such as Stephen Roach, a Professor at Yale and a former Chairman of Morgan Stanley Asia, points out that in urbanising, China cannot afford to wait to build its new cities and instead aligns investment and construction with future needs.

A McKinsey study into China’s urbanisation, published in February 2009, predicted that the country’s urban population could hit one billion by 2030. “In 20 years, China’s cities will have added 350m people more than the entire population of the US today. By 2025, China will have 221 cities with one million-plus inhabitants, compared with 35 cities of this size in Europe today and 23 cities with more than five million. For companies in China and around the world, the scale of China’s urbanisation promises substantial new markets and investment opportunities,” says McKinsey.

While China’s economy slowed in 2012, it did not collapse, points out Stuart Parks, Head of Asian Equities at UK-based independent investment manager Invesco Perpetual. China’s economy, he says, is rebalancing and the composition of growth is arguably becoming much more sustainable.

“Exports are contributing less to overall growth in the Chinese economy, although there are signs that these, along with infrastructure spending, picked up towards the end of the year. The new administration is unlikely to see the need to make wholesale changes,” he says.

There are a number of measures that need to be moved forward, in China, says Parks, including capital account reforms and the introduction of a market-driven banking system to support privately owned small and medium-sized enterprises (SMEs). “If reform measures are not pushed through, the long-term growth of the economy will be impeded in our view. There may also be an increase in inflationary pressures, such as we have seen in India, if supply-side bottlenecks are not addressed.”


Although economic reform seems a recent phenomenon in China, it dates back to December 1978 when the first steps to opening up the country to foreign investment were made. Underpinning reform are myriad regulations governing the financial markets and business environment. For multinational companies (MNCs) that are attracted to the opportunities that China represents, knowledge of the regulatory environment is crucial.

“The regulatory environment can be complicated for treasurers of multinationals operating in China to navigate,” says Percy Batliwalla, Head of Asia Pacific Sales, Global Transaction Services, Bank of America Merrill Lynch (BofA Merrill). “The central bank and government reporting requirements have a significant impact on treasury management activity, which is often different from frameworks in home markets. On-the-ground expertise and local market, regulatory and policy knowledge is vital for treasurers at MNCs in China.”

The speed of change in China, particularly in relation to regulations, can take many corporates by surprise, says Sonia Rossetti, Head of Product Management, West at Standard Chartered Transaction Banking. “What is today a fact, can change overnight.” Batliwalla identifies “three pillars” of the regulatory framework in China:

  1. China Banking Regulatory Commission (CBRC)

    Which is authorised by the PRC State Council to regulate the banking sector in China (excluding the special administrative regions of Hong Kong and Macau). It is also responsible for administration of the supervisory boards of the major state-owned banking institutions and other functions delegated by the State Council.

  2. The People’s Bank of China (PBOC)

    China’s central bank, with responsibilities for formulating and implementing monetary policy, issuing renminbi (RMB) and administering its circulation and managing the state treasury. It also maintains normal operation of the payment and settlement system, guides and organises anti-money laundering (AML) work of the financial sector, and monitors relevant fund flows, conducts financial statistics, surveys, analysis and forecasts.

  3. State Administration of Foreign Exchange (SAFE)

    Which is responsible for drafting relevant laws, regulations and departmental rules on foreign exchange (FX) administration. SAFE oversees the statistics and monitoring of the balance of payments and the external credit and debt, releasing relevant information according to regulations and undertaking related work concerning the monitoring of cross-border capital flows. It also supervises and manages the FX market of the state and undertakes operations and management of FX reserves, gold reserves and other FX assets of the state.

Entering the Chinese market can look more complex than it is in reality, says Rossetti. “The Chinese authorities allow things to happen in a very controlled environment because they want to ensure their financial model is sustained. Many of the measures that are taken in the country are first piloted with a small number of multinational companies and banks and once they are proven, they are very quickly rolled out.”

Recent reforms are enabling multinational companies operating in China to move their surplus cash outside of the country, approval of which is done on a case-by-case basis, says Yigen Pei, China Head for Citi Transaction Services. “This is a very important move and a positive step for MNCs as they look to move surplus cash outside of China.”

RMB internationalisation

The internationalisation of China’s currency, the RMB, is the big story for MNCs. In global trade terms, the RMB has risen from 30th to 15th in just 18 months, according to figures from financial messaging co-operative SWIFT. The moves to support internationalisation, such as relaxation of cross-border lending laws, are enabling corporate treasurers to free up cash that was previously trapped in the country.

Pei highlights that the RMB is not yet an international currency – only about 1% of the currency is held outside China. “However, cross-border lending in RMB is currently in pilot with a few companies. Once the Chinese regulators are confident that such a structure works, they will roll it out and we will see more RMB going offshore,” he says.

Despite it being early days, the internationalisation of the RMB has been a key focus for multinational companies, says Rossetti. “As China’s regulators continue to develop the regulations around the currency, multinational companies are looking to build structures that will enable them to move cash in and out of the country. The People’s Bank of China (PBoC) is piloting with a number of banks on plain vanilla processes such as pooling and netting for in-country and cross-border transactions.”

The pilot programme to allow RMB cross-border settlement began in July 2009 and has since been extended to regions and cities across China. Before the pilot scheme was launched the RMB was not permitted for cross-border transfer. No RMB conversion was allowed in the offshore market and no cross-border financing took place in the currency. The pilot scheme made it feasible for companies to invoice in RMB for cross-border trade of goods and services. RMB can be used for cross-border settlement and for a wide range of activities including generic payments and receivables, letters of credit, import and export collection and letters of guarantee.

RMB conversion in the offshore market is now allowed but is subject to an FX limit provided by the appointed clearing agent. Short-term cross-border financing of up to 30 days is also now permitted.

In January this year, Citi announced the completion of its first cross-border lending transaction in RMB on behalf of a European food company. The transaction was structured to optimise the company’s treasury activities by leveraging its China operation’s surplus cash. The lending to its group treasury centre in Singapore is a critical step to expand and include RMB into the company’s treasury management currency basket, says Citi.

Pei says the step creates a new treasury solution that enables corporates to connect China with their regional and global treasury centres, and achieve greater efficiency in their global fund usage and allocation. “This will also signify important progress of RMB internationalisation by establishing a bigger role for the currency in multinationals’ treasury management globally.”

Standard Chartered has also been active in this area. In November last year it became the first foreign bank to gain approval for a RMB 3.3 billion loan quota on behalf of a US global manufacturing and technology company. In addition to ensuring that the submitted application met the various key requirements (satisfactory cross-border lending rate, tax requirements and ability to monitor the utilisation of the quota) set out by PBoC, Standard Chartered is responsible for proposing the most efficient cross-border lending structure to support its client’s business goals. The quota is expected to support the MNC’s Chinese office’s ability to lend RMB to its overseas parent or other related companies which can in turn settle RMB denominated invoices.

George Nast, Global Product Head of Transaction Banking, Standard Chartered, says the programme brings greater efficiencies and control to Shanghai-based treasury centres where corporations can negotiate for better lending frequency and rates that match their actual needs.

Cash management

The internationalisation of the RMB, along with simplification of payments processing and account structures, are significant factors for corporates treasuries in China, says Pei. “It will take time for these changes to come into effect, but they will ultimately help multinationals to speed up structures such as shared service centres (SSCs) to optimise their payments activities. Cross-border pooling and netting in foreign currency, which also has recently been allowed, will help corporates to optimise treasury and cash management.”

He believes the priorities of multinationals operating in China have changed; a decade ago when companies were first moving into the country they wanted to ensure they had multi-bank capabilities and efficient processes. Operations were largely decentralised. Today, says Pei, corporates are looking to centralise processing and treasury management, which has been driven by the financial crisis. “Companies need to know what their future cash flows are and are looking to better use their internal working capital.”

When macroeconomics, demographics and demand dynamics are considered, the business ambitions of MNCs operating in China must be supported by efficient cash and liquidity management structures, says Batliwalla. MNCs in China have become more proactive in their approach to cash and liquidity management. “Increasingly, they are identifying the establishment of a streamlined banking structure, with a consequent reduction of costs, through improved use of effective payment and receipt methods, as a treasury priority. Accurate and timely reporting of communication of cash flows, which enable enhanced returns on cash balances, are also in the front of mind for MNC treasurers in China. Unsurprisingly, MNCs we talk with have also earmarked liquidity, improved controls, cash visibility, lowered financing costs and moving idle cash for regional and global deployments as major treasury management priorities.”

Technology is also an evolving focus. An increasing number of corporates are launching interfaces with ERP systems for payments, reconciliation and accounting efficiency. Similarly, electronic banking systems that provide high levels of security and technical support and streamlined account structures with simplified bank account management are becoming more common in China treasury spaces.

Batliwalla says MNCs in China are embracing a centralised treasury management model. “This is likely to continue and in greater numbers, MNCs are establishing payment factories, SSCs, centres of excellence and even global business service centres to centralise daily flows and achieve operational efficiency.” Furthermore, many MNCs are looking to improve returns from normal cash investment and FX deals under the proper risk controls, he adds. “More sophisticated treasuries in China are leveraging consultancy services from global partner banks to offer detailed information of local regulation, on the China macro picture and the larger domestic market.”

Case study

Chinese corporates go global – Lenovo Group

Lenovo Group Ltd is a Chinese multinational computer hardware and electronics company with operations in more than 60 countries worldwide. In 2005, the company acquired IBM’s personal computer business. Group Treasurer, Damian Glendinning talks to Treasury Today about his treasury operations.

What were the challenges following the transformation from being a Chinese company into a multinational?

The challenges mostly related to the business outside China, where everything had to be built from zero, as Lenovo did not have any operations outside the country before the acquisition of IBM’s PC business. The treasury operations inside China were operating smoothly and as efficiently as was possible within the regulatory environment – so there was no reason to change anything or interfere with them.

How does Lenovo integrate its Chinese treasury operations with its global operations?

For the time being, the two are still relatively separate. This is due in large part to the regulatory environment in China, which makes it difficult to use the cash we generate there to fund the business outside China, where our profit and cash generation record has not been as strong over the years. Having said that, all treasury is part of the same team, and we are able to vary payment terms on inter-company transactions to balance cash availability and needs, within limits.

Is the regulatory environment becoming easier (eg freeing up surplus cash in China)?

The regulatory environment is definitely becoming easier. The internationalisation of the RMB is going faster than any of us expected, and a lot of things are now becoming possible which could have only been dreamed of a few years ago, such as cross-border RMB pooling. However, this is still an evolutionary process: a lot of the changes are still in the experimental phase, and there is still tension between the desire (and need) for a more open system, and the – very good – reasons for which the controls and regulations were established in the first place. So not all the pieces are in place for a fully open system, and there will still be some time and some experimentation before the regulations are totally user friendly.

What advice would you give to treasurers of MNCs seeking to do more business in China?

The main advice to treasurers of MNCs doing business in China is not to expect business to be done the way it is in their home country. The regulations have shaped just about every aspect of how cash and treasury is managed in China, and the fact has to be accepted and acknowledged. It is important to hire good Chinese staff – and to listen to them. They have experience of the system and how it works. At the same time, it is important to be open to the changes, and to move to take advantage of them. However, many new regulations and processes are initially introduced as an experiment, so do not expect full certainty on day one – it is important to be able to live with a degree of uncertainty.

What are the current challenges for your treasury operations and how do you plan to overcome those challenges?

There are always many challenges in all operations. Frankly, China is not the area of our operations that causes me the most concern. To an extent there is a problem, it is keeping track of all the changes, and knowing what is the best time to implement them. But it is a good problem to have.

Citi’s Pei says multinationals now view China as a very important market and want to ensure their treasury operations in the country are efficient and are connected with regional or global pools to the greatest extent possible. “This will depend in part on the market and further deregulation. China is still undergoing structural changes and companies will have to adapt to the specifics and changing dynamics such as a rebalance between export and domestic consumption, digitalisation and increasingly sophisticated consumers.”

As the market evolves, says Batliwalla, corporates are addressing working capital efficiency challenges. For example, some have taken steps to shorten AR terms while at the same time, prolonging AP terms, incurring minimal or zero costs. Additionally, MNCs are mitigating their AR risk more actively or looking to remove some of the ARs off balance sheet, for which banks are developing more complex AR financing products. He says there has been a clear improvement across the industry in document flows and funding flow management, driven by a willingness by MNCs to leverage solutions and systems by banks to greater effect.

To maximise trade activities and operations, MNCs in China have gravitated towards supply chain programmes offered by local and international banks. “Although not a novel concept in China, supply chain finance (SCF) programmes have become more entrenched as MNCs take a more involved role in the working capital cycle of suppliers and vendors, and look to further enhance their relationships domestically. More recently, as MNCs look to take advantage of liberalisation policies regarding cross-border trade flows, many are turning to banks to provide solutions to manage cross-border settlement and other funds flows.”

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