Regional Focus

Mapping Asia: time to check co-ordinates

Published: Sep 2016

When someone stops to look at a map they are seeking not only directions from where they are now but also the best possible route to their destination. For a country to gain such insight, it takes a skilled observer. Some of the best-positioned in this context are the bankers that serve the corporate community. The views represented here reflect this experience.

Melvyn Low, ASEAN Head and Singapore Country Head, Treasury and Trade Solutions, CitiMelvyn Low

ASEAN Head and Singapore Country Head, Treasury and Trade Solutions, Citi

Sandip Patil, Asia Pacific Head, Global Liquidity and Investments, Treasury and Trade Solutions, CitiSandip Patil

Asia Pacific Head, Global Liquidity and Investments, Treasury and Trade Solutions, Citi

Debopama Sen, India Country Head, Treasury and Trade Solutions, CitiDebopama Sen

India Country Head, Treasury and Trade Solutions, Citi

ASEAN: standing at the crossroads

Consisting of ten countries, ASEAN presents corporate opportunities and challenges in virtually equal measures. With almost 50 years of co-operation, primarily to sustain regional peace, the focus today is increasingly on economic development. When the ASEAN Economic Community (AEC) was formed in 2015, one of its tenets was for the richest member nations to facilitate the growth of their emergent partners, eventually bringing all to par. But then ASEAN has always been about co-operation, says Melvyn Low, ASEAN Head and Singapore Country Head, Treasury and Trade Solutions, Citi. “This has now become an officially stated aim.”

To expedite this desire, the trade development agenda, led by AEC, has two clear angles. The first is the development of intra-ASEAN trade. Much had been achieved pre-AEC so that today, most of the tariffs placed on the trade of goods, for example, have been removed. This has gone a long way towards driving intra-regional flow to its current figure of $2.4trn, explains Low.

The second angle of approach concerns the ASEAN’s relationship with the rest of the world. Again, the background work was already underway before AEC took up the mantle so that now free trade agreements (FTAs) have been negotiated with the likes of China, Korea, Australia, New Zealand and Japan. The next step for AEC, as Low sees it, is to create a broader reach across Asia, where current multiple bi-lateral agreements assume more of a regional trade bloc feel, this being executed under the auspices of the Regional Comprehensive Economic Partnership (RCEP).

Two further items on the trade agenda are worthy of mention here, says Low. The Trans Pacific Partnership (TPP), an FTA between the US and 11 other countries including ASEAN members, Singapore, Vietnam, Brunei and Malaysia. TPP’s survival is largely in the hands of the US electorate as the presidential candidates take differing views on its merit. The second item is the continued longer-term development of China’s ‘One Belt, One Road’ initiative which seeks to promote both land and sea-based connectivity and cooperation between the People’s Republic and an extended family of Asian and European nations. It encompasses a strong maritime and overland stretch across ASEAN, suggesting the development of a logistics infrastructure which, notes Low, “will help ASEAN become more connected to the rest of the world”.

As infrastructural and economic developments are enhanced, so too is capacity for ASEAN to play host to international corporates. MNCs are entering the region looking to boost their supply chains, manufacturing here and exporting onwards. But, Low notes, they are also motivated by the prospect of selling to a growing consumer market, itself driven by a burgeoning, 170 million-strong middle-income population.

Seizing opportunity is not often achieved without first meeting basic needs and, says Low, the lack of financial integration in ASEAN is a downside. ASEAN is characterised by different regulations, dislocated payments infrastructures and “vastly different” monetary policies. This will pose a challenge for corporate treasurers seeking to fund in-country investments and maintain cash flows. “The obvious first approach is to look for an ASEAN bank,” says Low. It must be able to operate in multiple markets and capable of supporting treasury needs on the ground.

In response to the clear need for domestic institutions with pan-regional capacity, ASEAN finance ministry representatives recently signed a new framework agreement laying the ground for the creation of Qualified ASEAN Bank (QAB) status. Open to all based in the region, the scheme allows domestic clients to expand cross-border in the company of a familiar partner.

However, the broader goal is to achieve deeper financial integration within ASEAN by 2025. This, says Low, will see the emergence of multi-national and global banks as key facilitators. Citi’s 100-year history in the region gives it a profound local knowledge of corporate and consumer requirements, enabling it to compete head-to-head with domestic players, helping incoming MNCs set up and establish operations.

But, he adds, Citi also has the power of its far-reaching branch and correspondent banking network, its single platform and a broad range of finance solutions to aid in-country, cross-border and, ultimately, global corporate trade. In addition, he says Citi is able to extend to clients, the advantages of its position as one of the region’s largest foreign bank tax payment agents.

ASEAN is on an upward curve, sustaining an average growth rate of 4.5%. Whilst other markets across Asia are strong competitors, Low states that ASEAN provides “a very welcoming environment in which to grow”. The traditional manufacture and export model is strong but fast-growing mobile and internet usage is placing ASEAN as “the next frontier for e-commerce”. Chinese giant, Alibaba’s recent $1bn takeover of ASEAN competitor, Lazada Group, speaks volumes about market expectation.

Indeed, the pace of development will quicken alarmingly, warns Low. This will open the floodgates for many more corporate opportunities. Treasurers operating in ASEAN need to be thinking and operating at “lightning speed”: for a foreign corporate, having the right global banking partner in place has never been more appropriate.

China: further on up the road

China is still going through changes. It has been aiming for the top spot as a trade nation for some time but what we see today is still a ‘work in progress’. The Peoples Bank of China (PBoC), alongside its foreign exchange regulatory agency, State Administration of Foreign Exchange (SAFE), continues to oversee internationalisation of the country’s currency and trading environment and it knows that to be the dominant global trading nation, its currency must be global too.

In recent times, RMB has gained significant ground. It is now easier to use for import/export transactions, enabling companies to bill in RMB for international trade. But, says Sandip Patil, Asia Pacific Head, Global Liquidity and Investments, Treasury and Trade Solutions, Citi, it is important from a regulatory standpoint to promote RMB not only as a trade currency but also as a currency for investment and liquidity, and as a reserve currency, “so that it can attain true global status”.

It is making solid progress. Chinese authorities have, for example, created a number of experimental Free Trade Zones (FTZs) such as in Shanghai. These, notes Patil, give the full experience of free trade for all stakeholders and counterparties but also allow for rapid learning in a controlled environment. Such a move has gone a long way to making the international corporate community comfortable with trading in and out of China.

In a broader context, Patil observes many MNCs are keen to test China’s changing trade environment. They have started using RMB in their trade settlements and setting up RMB-denominated entities, using it as a working capital currency. Some have even set up netting centres, in-house banks and treasury centres.

“There has been a lot of successful experimentation,” comments Patil. “At Citi, we have many clients transacting on a daily basis, settling in China using sophisticated centralised treasury models.” These may be based in Singapore, Hong Kong or London, but their China business requirements, from a treasury, funding and FX perspective, are now being met. This, he declares, “is a dream come true”.

There are some key steps that will take this journey to the next waypoint though. Improving availability and access to both onshore and offshore liquidity is vital to make sure the markets remain stable. There is also a pressing need for deepening offshore markets – bond markets, in particular. “The deep, liquid onshore RMB market does not necessarily help foreign participation,” says Patil. An increase in the number of offshore players in the onshore market is desirable. A structure thus capable of providing significant liquidity will give corporates who want to use RMB “peace of mind”.

The offshore market exists because China’s capital account is not fully convertible. This means two versions of the same currency exist: official onshore yuan (CNY) and its offshore proxy, CNH. The payment exchange conversion rate is at par but differs when converting to another currency. This can create arbitrage and, for some, is unsettling. For Patil, co-mingling will limit disquiet.

Regulatory liberalisation is ongoing though and recent PBoC changes related to interest rates are a positive indicator. “As we see free market interest rates on both the liability and asset side, it will present a major boost to the money market infrastructure,” he notes. This will not only create further confidence amongst market participants but will also translate into more efficient products.

It is sometimes easy to forget that China is still an emerging market. Occasionally when exposed to such a risk, market jitters can shake corporate confidence. But look beyond this to China’s long-term sustained line of growth and a core strength that is “extremely positive” is seen. Furthermore, the anticipated changes in China will build upon current market confidence “taking RMB to the next level”.

When viewed in the context of a global slowdown, the strategic importance of China to many of Citi’s customers remains intact. Whilst the short-term ‘red flags’ consistent with operating in an emerging market must be managed, working capital management must remain in focus. In an effort to optimise funding and performance, he observes companies seeking to digitise cash flow cycles, deploying cash flow forecasting tools and improving their response to liquidity issues (in particular trapped cash). A move to cross-border lending, automated pooling in RMB, ‘on-behalf-of’ and netting structures, and offshore financing of mainland operations are also increasingly observable trends.

A number of international banks have, to a greater or lesser degree, the capacity to service corporate clients in this market. And whilst China has introduced the SWIFT-like Cross-border Interbank Payment System (CIPS) to tackle some of the fragmented offshore clearing seen today, Citi of course can boast an enviable clearing presence within China. But there is more to it than flexible technologies and a broad product set.

Indeed, given that the market is volatile and subject to many significant regulatory changes, there needs to be a connection between the client’s business on the ground and its strategic thinkers and key decision-makers. This comes from a well-developed advisory function. For Patil and Citi, having the depth of knowledge and understanding to help clients navigate and manage this growing space is what marks the difference between a functional bank and a global partner.

India: the road less travelled

In exercising a political and economic will to open up the country to trade, India is a country intent on fulfilling its potential. In the first phase of recent reforms, it sought to liberalise foreign direct investment (FDI) across multiple industries, and it swept out a lot of trade-related bureaucracy, bringing instead more clarity and predictability. It also kick-started a number of key infrastructure projects, tackled fiscal consolidation through strong discipline, and sought to bring the country’s current account deficit back into line.

As the second phase of reform swings into action, India is now focusing on driving forward the digital initiative. This, notes Debopama Sen, India Country Head, Treasury and Trade Solutions, Citi, will have a direct impact on how corporates do business in and beyond the country. By building out the broadband and telecoms infrastructure, banking the unbanked and implementing the nationwide Aadhaar biometric ID programme, there is an opportunity to transform e-commerce and encourage growth within consumer facing industries and their supply chains.

The effects of reform are notable. In 2015, India was possibly the largest recipient of FDI globally with commitments of around $63bn, and annual growth of almost 30% between 2014 and 2016. Overall economic growth is 7.6%, expected to hit 7.8% by 2018.

Although in 2016 India is ranked 130 in the World Bank’s Ease of Doing Business report, this has improved by 12 places since 2015. But the government target is to move into the top 50 in three years. Some major investments by large corporates have increased confidence in this respect – Foxconn’s May 2015 $10bn manufacturing plant for iPhones notable amongst these. Other household names coming on board include Amazon, Suzuki and Siemens. “There is optimism and faith in the measures being taken,” comments Sen.

It’s not all ‘green shoots’ though. Some of the challenges on the ground are still very much present. In the same World Bank report, India’s ranking for starting a business is 155; and ranking for resolving insolvency is 136. “The government however is resolute and the passing of an insolvency law earlier this year shows strong will”, notes Sen. In August too, after much debate, the Constitution Amendment Bill for Goods and Services Tax (GST) was passed. Once approved by 50% of the states, it will replace indirect taxes with a common approach. “For any corporate operating in multiple States – perhaps manufacturing in one and selling in another – it removes multiple points and different levels of taxation,” explains Sen. Economic research suggests GST will have a positive impact of between 1% to 2% of GDP.

Sen is keen to draw treasurers’ attention to the fact that the domestic Indian market is huge and consumer behaviour is rapidly changing. This has consequences. “In the last five years, from a small base of $4.4bn in 2010, we grew to a $22bn e-commerce market in 2015,” she notes. The expectation is that this will hit $100bn by 2020. The digital-savvy nature of the new Indian consumer is affecting purchasing and banking channels – and this is now reaching into business realms too. “The traditional distribution model of manufacturer to distributor to retailer to consumer is going through a transformation,” she explains. “Many consumer goods companies now want to reach end-consumers directly. Initially this was just to create awareness but now many of our clients are considering selling directly online.”

It is an approach that has necessarily forced new thinking on how corporate payments, cash collections and reconciliations are executed. If proof were needed, India’s 24/7 real-time inter-bank fund transfer mechanism, Immediate Payment Service (IMPS), launched in 2010, now clocks up around $3.5bn of small-value settlements per month and rising.

With ongoing legislative and regulatory reform, and changes in the consumer mindset and the digital infrastructure all coming together with great serendipity, treasurers must stay ahead of trends. This applies equally to both domestic and cross-border trade. Of the latter, there is a concerted government effort to drive up current export levels from $260bn today to $900bn by 2020. “This will primarily be achieved by looking at more trade partnerships across different countries, regions, and products,” says Sen.

These plans are ambitious and banking partners should be equipped to play their part. Their corporate clients need to stay abreast of domestic and global developments and be detailed on what these mean, and how they can be leveraged.

As part of its ethos of local involvement, Citi has a hands-on approach to delivery in this respect. It is, for example, at present partnering with the Indian Customs authorities and the Ministry of Finance on a major trade digitisation project. The administration has been “very receptive” to inputs from client workshops and research provided by Citi through its domestic and international corporate clients. It is this kind of two-way relationship, anchored by Citi’s long-term on-the-ground experience and knowledge, that Sen believes will prevail as India’s stock continues to rise.

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