From the May 2010 issue of Treasury & Risk magazine

Re-enter the Dragon

David Koh leads transaction banking strategy in China for Deutsche Bank as head of Global Transaction Banking (GTB) and Corporate Banking Coverage for China. Koh's 17 years of experience in global banking, specializing in corporates and international trade, span the U.S., Asia, the Middle East and Europe.

Many multinational companies adopted a "wait-and-see" approach toward their plans in China last year as they focused their efforts on ensuring the sustainability of their businesses in the wake of the unprecedented global financial crisis.

As the recovery gains momentum and worldwide economic growth resumes, China is back in the spotlight: riding the market revival, rebounding faster than most of the economies in the region, and starting to flex its muscle as one of the United States' top creditors.

T&R: Can companies afford to overlook China now?

Koh: Although doing business in China can be challenging, with perseverance and a long-term view, many companies are benefiting from China's strong rebound at a time when the recession has slowed sales in their home markets. Foreign companies in many industries now have access to Chinese businesses and consumers. Companies that ignore the growth of the Chinese market do so at their own peril, as their competitors may be already reaping the rewards of a first-mover advantage in this market.

Achieving cost efficiencies is no longer the key benefit of doing business in China. While this may still be a draw for selected industries, the overriding plusses of doing business in China are growth and volume. China's recent economic expansion has turned the country into a major importer of Western products. That and the size of its population and the emergence of the dynamic Chinese middle class offer any international company access to one of the world's most important markets across a wide range of products, from consumer goods to financial services. Some successful foreign companies in China, we've noticed, have customized their products to meet the needs of Chinese consumers.

T&R: What are some of the key challenges?

Koh: Our transaction banking clients across many industries say some key challenges are a shortage of talent and the ease of access to capital markets and funding. A business in which revenues and the work force are rapidly expanding must have talent to ensure long-term, sustainable profitability. There are many talented people in China, but the sharp growth in demand has stretched the pool over the past 10 to 20 years.

As for capital markets and funding, China is making a concerted effort to open its market. This is a large and fast-growing economy, and regulations are necessary to ensure balanced development that does not spiral out of control. That said, companies must learn to adapt and, more importantly, develop a long-term view of how they can take their business to the next level in this competitive environment. In a dynamic market like China, companies look for a transaction bank that has an extensive international network, robust financial standing and strong onshore expertise to provide the optimal working capital and liquidity. In a large market, technology that enables transparency, control and automation can ensure efficiencies in the whole transaction process.

T&R: How are your clients affected by changes in China's import regs?

Koh: While the changes are somewhat complicated, these new regulations were designed primarily to counter speculation in the RMB (renminbi) and commodity prices. China is generally very transparent with regards to what comes in and out of the country and encourages elements of global free trade, which can be seen from its engagement with the World Trade Organization.

Where there is constant pressure on RMB valuation and volatility in the prices for many different types of commodities, Chinese regulators are trying to tighten reporting requirements to ensure that there are true underlying trade transactions. Many of our clients have adjusted to the new requirements, and the overall growth in trade numbers over the last few months indicate the same for the overall economy.

T&R: What's happening in trade finance and cash management?

Koh: China is focusing on growth in demand for domestic trade. Foreign companies can now access Chinese businesses and consumers more easily. While the focus of many foreign and locally owned manufacturing facilities was previously on exports, it is now on the Chinese domestic market.

When it comes to cash management, the effort is all about maximizing the value of funds and implementing the best liquidity solutions, especially for larger companies with many subsidiaries or legal entities across China. In terms of the regulatory environment, the China Banking Regulatory Commission (CBRC) recently announced new regulations on working capital facilities and how these are to be considered when approved by banks, including how the use of such facilities must be monitored.

Banks must consider how often they are to check client records to ensure proper application of funds and possibly even take on entrusted payment instructions. We understand that the CBRC is looking to minimize speculation in the market. There is much work to be done by banks to guarantee compliance with these new regulations and there will be a significant impact on market liquidity as banks begin to tighten lending standards and monitor use of funds.

T&R: How will the RMB Offshore Settlement Pilot Program affect corporates?

Koh: This long-term project should ultimately lead to the internationalization of the RMB. It is being introduced in phases. The first set of concrete regulations, which came out last year, allows selected enterprises in China to settle in RMB for cross-border trade transactions with companies in Hong Kong, Macau and Association of Southeast Asian Nations (ASEAN) countries. (The ASEAN countries include: Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.)

Today, most trades are settled in U.S. dollars (USD). When Chinese firms export goods to Hong Kong, Macau and ASEAN countries, the companies in these locations need to exchange their domestic currency for USD to settle the transactions. As a common practice, Chinese exporters build the expected USD forward rate into the selling price, knowing they must convert the trade settlement from USD to RMB in China to pay for raw materials and expenses. This is inefficient as two foreign exchange (FX) transactions are needed to cover both the export and import side.

Under the RMB Offshore Trade Settlement Pilot Program, companies can settle international trade in RMB, eliminating one FX transaction. Apart from the impact this has on the selling price, importers in Hong Kong, Macau and the ASEAN countries may be able to obtain a better FX rate due to economies of scale, since they will have larger FX volumes than individual Chinese exporters. Depending on the size of a company's business in or with China, this would also have a profound impact on how companies choose to handle their payments and collections in China and more importantly, cross-border in RMB.

Deutsche Bank has enhanced its range of RMB service offerings in Hong Kong to help clients benefit from the program. Nonetheless, since the project's scope is currently limited to only the selected pilot enterprises, it will take some time to develop the program before RMB eventually becomes a global currency for trade settlement.


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