Brick-by-brick, U.S. execs are working to change the face of cash management
When General Electric Co. hired Charles Cao in 2005, it may not have realized all it was getting. With his many years running treasury operations in China for French telecom giant Alcatel and before that, heading up corporate banking for Credit Agricole Indosuez from there and Paris, Cao clearly embodied all the much sought-after qualities of the elusive finance job candidate for China—bilingual, familiar with both Western and Chinese treasury and banking practices and hands-on experience dealing with both. As it turned out, he represented a ticket to bringing progressive treasury practices to GE’s Chinese operations.
Admittedly, the GE name and extensive business presence was no small factor: GE manufactures in China, exports to China and imports from China; its NBC subsidiary is now preparing to broadcast the 2008 Olympics from Beijing. But by installing Cao to run the multinational’s three-person treasury team out of Shanghai, GE was recognizing a key component of a best-practices finance strategy for operating in China: a company needs on-the-ground expertise with a track record of doing business with the Chinese banking establishment and regulators.
Over the past few years, GE’s corporate treasury and Cao have achieved amazing advances in the multinational’s ability to move cash, using a variation of existing entrustment loans to create effective cash pools within China, first for Chinese renminbis (RMB) and then for U.S. dollars. Now, working with the China Construction Bank and the China Merchants Bank,
GE has gained permission to experiment on a micro level with the first functioning cross-border cash pool in China.
For the past year, GE has been able to send limited amounts of excess cash that accumulated in China back to corporate treasury in Connecticut, where it has been used to pay down commercial paper. Later the money is returned to China. “The Chinese banks are working with us. They quickly understood the concepts and helped us gain regulatory and government endorsement for what are common practices in most markets around the world,” reports deputy treasurer Dennis Sweeney. “It’s a baby step, but an important baby step.”
That’s the way treasury practices are evolving in China—small, but important baby steps forward in a government-controlled economy otherwise known for its giant strides. The authorities in China are no longer “insular,” observes Dave Robertson, a partner in the Chicago office of Treasury Strategies Inc. “They’re aware of what’s going on in other markets, and they’re encouraging banks to experiment and evolve.”
After years of global liquidity managers struggling to free cash trapped unproductively in China, what is making the difference in the ability of companies to work more efficiently there? Simply put, both China and the multinationals are getting to know each other’s needs better, and while familiarity can sometimes breed contempt, it more importantly brings an all-important level of comfort—and even trust. “On the surface, China seems very complex, but underneath, it is very organized,” explains Linda McLaughlin-Moore, product head for treasury services in the Asia/Pacific region for JPMorgan Chase. “China wants to play nice and is looking for opportunities. This is a banking system of knowledge and built to make regulators comfortable with what’s happening. This is where having local talent on the ground has been absolutely paramount. Chinese bankers understand the need to move money and are now working with companies to create instruments that are endorsed by regulators.”
Progress is not limited to GE. The newest opportunity for liquidity management within China is evident in the Pudong Nine Measures, which will allow cash pooling of foreign currencies within China for companies that qualify, reports Michael Fossaceca, senior vice president and global corporate treasury executive at Bank of America. The program “will improve in-country liquidity management,” he suggests. “You will be able to pool foreign currency balances like you can now pool RMB balances.” Qualifying is complicated and requires locating a regional headquarters in the Pudong New Area in Shanghai. A qualifying company also must have at least three legal entities and a total investment of at least $3 million in China. But the rewards include fewer restrictions on in-country pooling and easier movement of funds to subsidiaries outside China.
It’s getting easier all the time to manage liquidity in China, summarizes Mona Zhong, head of cash management for corporates in China for Deutsche Bank’s Global Transaction Banking. Entrustment loans allow companies to move money from one legal entity to another. In a standard entrustment loan structure, one legal entity of a corporation may deposit excess amounts in its account at a bank. The bank in turn may lend the money to another legal entity of that corporation that is short on cash, charging the interest rate agreed by both parties, using the arm’s length principle.
The bank may guarantee the loan and take credit exposure, or it may act only as an entrust agent with no credit exposure. Companies using such entrustment loans also are able to increase yields on surplus cash, which otherwise would earn the relatively low fixed interest rate that applies to idle balances in accounts, Zhong explains.
Intel Corp. is another company in China taking advantage of entrustment loans. “Liquidity management is still very much a challenge,” says Robert Yenko, the company’s assistant treasurer responsible for managing the Asia Pacific region. “You have to be creative and look at innovative ideas like entrustment loans and QDII accounts.”