Moving cash in and out of China was once a big headache for corporates operating in that country. Thankfully, that is now changing. In this article, IBM tells Treasury Today how regulatory changes allowed it to implement a more efficient and effective cash management solution enabling entities in China to centralise funding and FX and standardise processes into the group’s global in-house bank.

Founded in 1911, IBM is a multinational technology services and consulting company with global headquarters in Armonk, New York. IBM manufactures and markets hardware and software, and offers infrastructure, hosting and consulting services in areas ranging from mainframe computers through to nanotechnology.

Problem…

Like many companies operating in China, IBM historically had restrictions with moving cash in and out of the country. Traditional structures to fund working capital either created entrustment loans which are inefficient, or required onshore bank financing which was more expensive than using internal sources of cash. As a result, IBM experienced an increased cost of doing business in China. Each local entity conducted their business directly with offshore IBM entities and vendors which generated high volumes of two-way, cross-border, foreign currency payments with associated compliance requirements. The model was decentralised with foreign exchange (FX) conducted at the entity level with limited opportunities for consolidation.

…Solved

The regulatory changes introduced in the first half of 2014 by the State Administration of Foreign Exchange (SAFE) provided an opportunity for IBM to implement a more efficient and effective cash management solution in China. IBM could now centralise working capital funding and FX management to drive down costs whilst also integrating China into the group’s global in-house bank. Working with Citi, IBM received approval from SAFE under the Foreign Currency (FCY) Centralised Management Programme in November 2014 to implement a new solution under the FCY Pilot Programme. SAFE allowed IBM to utilise its entity registered in the Shanghai Free Trade Zone (SFTZ) to roll out a number of solutions including: an automated FCY cross border pool between the SFTZ and London, a FCY intercompany netting solution, and a FCY payment on behalf of/receipt on behalf of (POBO/ROBO) solution to streamline 3^rd party transactions.

Citi was selected to work on the project after IBM conducted a thorough RFP process. “The FCY Pilot Programme has helped solve many of the challenges that we faced in China,” says Chang. “We are now able to bring cash in and out of the country thanks to the cross-border pooling structure and this offers much greater flexibility in funding.” Although there are still limits to the amount of cash that IBM can move in and out of the country, the automated nature of the solution means that IBM can keep within the SAFE borrowing/lending quotas whilst minimising the actual amount of foreign debt quota leveraged. “The fact that the limit applies to the whole group and not each individual entity also gives us the flexibility to make sure that the correct entity receives funding at the right time,” adds Chang.

The unique approval from SAFE allowed all FCY intercompany netting settlements to be settled in RMB which, aligned with an automated domestic RMB cash pool, meant that IBM was able to eliminate all but one of their FCY accounts in China and could move working capital funding more efficiently to their China entities. Citi’s solution has streamlined payment supporting documentation, significantly reduced the number of cross-border payments, reduced transaction costs and centralised FX to save on FX margins. The solution has also allowed IBM to centralise and standardise treasury processes in China to be the same as their global in-house bank. Significant operational, administrative and funding efficiencies have been generated. “Combined these benefits have brought numerous cost savings and allowed us to leverage economies of scale to obtain the best deals reducing the cost of doing business in China,” says Chang.

The structure that IBM has implemented demonstrates how SAFE has made China a more business-friendly environment in which to operate. “If you compare what we can do now, with what we were able to do a few years ago, it is a remarkable change and most, if not all, of the roadblocks that previously prevented a treasury efficiently operating in the country have now been removed,” says Chang. “This is something that we greatly appreciate and I am sure that going forward many more companies will be able to reap numerous benefits from these changes.”