Cross-border pooling: the Holy Grail for treasurers in China

August 2013

Cross-border pooling would go a long way to end the pain of trapped cash in China. Speaking at the EuroFinance Singapore conference, Robert Yenko, Regional Treasurer, told the story of Intel’s journey to effectively and efficiently manage its cash on a global basis.

Robert Yenko, Regional Treasurer, Intel, began his talk at EuroFinance Singapore 2013 with a short story to illustrate the transformation that has occurred in China during the past 20 years. In 1994, as part of a team selected to set up Intel’s first factory operations in Pudong, China, he went along with a couple of colleagues to visit the Head of the Capital Accounts Division of State Administration of Foreign Exchange (SAFE). They arrived at the office five minutes early to find a smoke-filled room and the capital accounts manager in his undershirt – he wasn’t quite ready for their arrival.

Today, the Chinese authorities are more than ready to do business. They are consciously building close relationships with multinational companies (MNCs) in order achieve their main objective: to make China the next global finance and treasury centre.

 

Intel in China

As the world’s largest semi-conductor company, Intel operates in 63 countries, reaps $53.3 billion in revenue worldwide and has a net operating profit of $14.6 billion (2012). It employs 105,000 talented people, including 80,000 technicians, 5300 PhDs and 4000 MBAs. Social responsibility is an important part of the company’s objective and it is one of the largest voluntary purchasers of green power in the US.

Today, 75% of the company’s product sales come from outside the US, with just over half (55%) coming from Asia and 15% from China, specifically, which accounts for $8bn of revenue.
Intel opened its first sales office in Beijing 1985. Just over ten years later, in 1996, it opened its first factory in Pudong and set up a research and development (R&D) laboratory in Beijing 1998. In 2003, the company built an assembly and test factory in Chengdu and then its first wafer fab outside US and Europe in Dalian in 2007. The company has invested more than $5 billion and now has 11 legal entities operating in the country.

The company holds approximately $1 billion of cash in China. “Although other companies hold much more, this is a large amount for us – almost a quarter of the total cash portfolio in Asia. Therefore, it is very important for us to be able to manage the cash effectively,” Yenko says.

 

SAFE engagement

Intel’s evolving relationship with SAFE did not happen overnight, emphasises Yenko. In 2004, SAFE introduced Rule 104, which allowed domestic cash pooling with US dollars, and at the same time it allowed one-way cross-border lending. However, there was a caveat – Rule 104 was specifically targeted at companies with a regional headquarters (RHQ), which Intel didn’t have at that time. “Therefore, we explored how we could restructure our legal entities in China so that we could participate in this Rule 104,” says Yenko. In 2005, it set up an RHQ for its subsidiaries and operations in China.

As a result, in early 2007, Intel was allowed to do its first cross-border loan, which was a significant milestone for the company. “We were one of the few companies that could move money outside China, and we took advantage of the programme. Of course there was a limit – it wasn’t a free-for-all,” he says. The limit was linked to the level of profits that a company generated in China.

Intel then petitioned SAFE for approval to perform domestic cash pooling in US dollars. “This didn’t address trapped cash issues because it is still a domestic cash pool in China. However, it allowed us to effectively manage our domestic liquidity within China, so that we can use our cash wherever we want to in-country. This vehicle allowed us to maximise the use of our cash and deliver it to the companies that needed it most,” explains Yenko.

But in 2009, SAFE suspended Rule 104 (cross-border lending) and replaced it with Rule 49. “There were no straight answers as to why the change was made, but after two years of cross-border lending all of a sudden we couldn’t do it anymore. Our in-country cash started to balloon over time,” says Yenko. That is, until the company caught a “big break” last year.

Since 2004 Intel has always maintained good relations with SAFE. “We don’t just approach them when we need something; there is always close collaboration, not just at a working level but at policy level.” This was Yenko’s key message to the audience in Singapore: it is important to maintain and develop the relationship over time. In Intel’s case, this closeness paid off.

In June 2012, the company was invited to participate in a US dollar cross-border cash pooling pilot programme. Yenko and his team had to come up with a proposal and application, and in December 2012 received SAFE’s approval to become a part of the pilot programme. In January this year, Intel made its first transaction. “This is the Holy Grail for treasurers in China – having the flexibility to move money outside of China and to be able to invest it the way we want to. It is a big win for us,” says Yenko.

 

Details

There are two parts to the SAFE pilot scheme. One part is the foreign currency cross-border cash sweep. This means that a company has to set up two master accounts, one international and one domestic, where it is able to pool all the cash from subsidiaries in China. It can eventually move it to an original cash pool held outside of China. “This addresses our needs,” says Yenko. “We were building up cash in China and wanted to be able to move it and invest it or spend it the way we wanted outside of China.” Of course, this was all within a controlled quota, which is dependent on how much investment a company has in China. Intel doesn’t sweep cash on a daily basis but only on-demand.

The second part of the SAFE programme relates to the centralisation of collections and payments, and being able to centrally collate and process trade payments within the RHQ. This is effectively payment-on-behalf-of (POBO) or receiving-on-behalf-of (ROBO) scheme in cash management terms. “Our RHQ is able to manage, process and pay on-behalf-of other subsidiaries operating in China,” explains Yenko. “This comes in conjunction with a cross-border netting ability. So we are able to do cross-border netting for payables and receivables from offshore.”

 

Benefits

Yenko listed a number of benefits, including:

• Efficient liquidity management.
  
• Achieving better returns through economies of scale.
  
• Ability to fund expansion wherever it happens.
  
• An effective platform to manage trapped cash.
  

“This last point has always been the primary issue for most treasurers in China – and we are not an exception to that. That why we participated in this pilot programme – to be able to move our money out of China and invest it in the way our board wants it invested. We also have better control and visibility via our master accounts,” says Yenko.

 

Challenges

But the pilot programme also presents challenges. “It is a strain on our resources, whether before or after implementation,” says Yenko. “Before we implemented it, there was a lot of communication, documentation and applications going back and forth. One time SAFE asked us to submit an application in just four business days.”

In addition, there is a lot of post-implementation reporting. “This scheme is very important to SAFE, as it will determine the path to currency convertibility. Therefore, the managers want feedback on a regular basis – we meet with them face-to-face once a week to give them a status report and our future plans.”

Scalability of the pilot programme is another challenge. “Being able to scale the programme up and move $1bn outside of China is a challenge. It is something that we are working on and hopefully the second part of the programme will address scalability,” he says.

Yenko’s final tip for other treasurers: “It is very important to work with a bank that can address your company’s needs, is familiar with the landscape and one that understands the nuances of dealing with SAFE and the Chinese government.”

He ended his presentation by reminding the audience of the quote by Deng Xiao Ping: “Crossing the river by feeling the stones”. “This is what it is all about. The Chinese authorities want to be able to test every step of the way before they roll it out. That is how China operates and they have been very successful using that model – and we respect that.”

This insight was first published on www.treasurytoday.com