Concerns in late 2009 and early 2010 that a further souring of the global trade environment could jeopardize the ability of Chinese companies to honour their payment commitments to suppliers dissipated somewhat when global trade volumes recovered in a major manner, even if problems in more developed economies have persisted.
But Chinese firms continue to face challenges, as the government introduces macroeconomic measures with a view to addressing imbalances.
Peter Wong, the founding chairman and president of the International Association of CFOs and Corporate Treasurers (China) discusses with The Asset the various ways in which corporate treasurers across the country are coping and how best they can hedge the risks facing their companies.
Is China suffering from a major credit crunch?
The credit availability may be tight for certain industries, such as real estate, where excessive price escalation is to be curtailed. The fundamentals of China remain solid with inflow exceeding the outflow of capital. While the new Five-Year Plan [from 2011 to 2015] is expected to be positive to the credit market, the emphasis will be more on the quality rather than pure quantity of economic growth.
What should treasurers do today to better prepare their companies for growth in China?
Treasurers should develop a renminbi and foreign currency cash pool inside China to efficiently centralize the control of cash. In so doing, there is a need to rationalize bank relations. The currency mismatch between revenue and expense and that between asset and liability should be managed properly in light of the continued appreciation of the renminbi. To improve financing flexibility, treasurers should develop a renminbi corporate bond programme both offshore in Hong Kong and onshore in China.
How is the global economic recovery changing the outlook of corporates in terms of managing their working capital and liquidity position?
The additional round of quantitative easing in the US suggests that the recovery will take time. The high fiscal borrowing in the US and Europe may crowd out the bond market. Treasurers have larger cash balances as there is no urgency in capital expenditure in a recession and the desire to build a buffer against liquidity risk.
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How active should treasurers be in hedging risk?
The liberalization of domestic interest rates in China and inflation expectations will increase refinancing risks for treasurers. The future development of the renminbi corporate bond market is important. In 2010, foreign companies have been permitted for the first time to issue offshore renminbi corporate bond in Hong Kong. In 2007, the China Securities Regulatory Commission began to approve domestic corporate bond issuance.
We wish CSRC can start allowing foreign companies to issue bond as well next year. The long-term trend of the renminbi strengthening is difficult to hedge. The recent liberalization of trade finance settlement with renminbi may help exporters to bill and receive payment in renminbi to offset their cost base in the same currency.
What changes and enhancements are treasurers making in their regional and global treasury operations?
There is increasing use by treasurers of a treasury management system to centralize the control of cash and risk management. Treasurers are taking steps to realign their bank relations in light of the impact of the financial crisis on the banking system.
What’s the appetite among Chinese treasurers for outsourcing more functions and processes?
The first challenge is to centralize the cash management responsibility to the central treasury operations before outsourcing can be seriously considered. Such treasury transformation requires serious management commitment and expertise to be successful. The introduction of the Basic Standard for Enterprise Internal Control (aka China-SOX) by the Ministry of Finance will be a catalyst for the change in mindset of centralizing operations to minimize treasury risks.
The treasurers want to have the process and system to efficiently centralize their cash either regionally or globally to reduce unnecessary borrowing cost and control unmatched currency exposure to the minimum. Second, they want to achieve an efficient mix of in-house treasury processes which they need to control and those which banks or vendors can perform better due to scale and technology. Third, treasurers want a seamless connectivity between their ERP and TMS as well as that between their in-house system and the banking system.
This was published in the December 2010 issue of The Asset
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