With regulatory uncertainty gradually being replaced by concerns over trade flows and the trajectory of major currencies, corporate treasuries are looking for efficiencies in their operating models.
Corporate treasurers have typically operated in decentralized models, but a new wave of challenges is causing many to rethink their structures.
Asia is facing a tidal shift in currencies, rates and political risk caused by the winding down of the U.S. Federal Reserve’s quantitative easing, slowing global trade and rising barriers, intense regulatory scrutiny, reduced U.S. dollar hegemony and the increasing role of the RMB.
In Asia’s biggest economy, China says it wants to make the market a principal guide of its exchange rate, yet the government’s interventions in the offshore RMB market suggest otherwise, Pete Sweeney, Asia Editor, Reuters Breakingviews, explained.
The CNH market is less efficient than before, as regulatory uncertainty and currency controls make China-based investment decisions more complex, Sweeney said.
As China has tried to prop up the yuan to stem capital flight, other Asian neighboring currencies have slid against the dollar, Sweeney told attendees at the recent Thomson Reuters Treasury Centralization Forum in Hong Kong.
That has seen other governments like Malaysia also intervene in currency market functioning in order to control flows.
In this environment, policy coordination is hard to accomplish. However, while many feared a strong reaction to the Trump election, both in terms of U.S. and Asian policy, the reaction has largely been muted.
At the same time, technology is bringing swift change to treasury management, explained Raj Melvani, Head of Market Development, Corporates APAC for Thomson Reuters.
Cloud-based services now mean corporate treasuries can pull funding tasks from local markets to centrally based expert staff, as it becomes easier to move up the technology curve, Melvani added.
As Asia became a source of growth, multinational and Chinese corporates have expanded into the region.
Operating in multiple locations and under multiple currencies and regulations, combined with more stringent capital requirements and the end of quantitative easing, has prompted many multinationals to consider setting up corporate treasury centers (CTC) in a single Asian market.
Against this backdrop, the Government of Hong Kong is actively working to create attractive conditions to lure more treasury activity into the city.
Attracting more treasury activities will help develop Hong Kong’s financial market and bolster Hong Kong’s status as an international finance center, said Sara Yip, Senior Manager (Market Development), Hong Kong Monetary Authority (HKMA).
As their international business grows, multinationals move through stages from a decentralized structure, to in-country and regional centralization, shared services centers and finally in-house bank to maximize efficiency, Yip said.
She highlighted Hong Kong’s advantages as its free flow of capital, premier financing platform, largest offshore RMB pool, simple and low tax regime, sound legal system, abundance of talents, and easy access to the rest of Asia.
Double taxation agreements
Hong Kong continues to channel a majority of foreign direct investment into China, growing from 53 percent in 2010 to 63 percent in 2015, Yip reported. She added that 62 percent of Chinese outbound direct investment went through Hong Kong in 2015.
Nowadays, the RMB is not just a currency for trade settlement, but also for direct and portfolio investment, which plays to the Hong Kong’s strength as the largest offshore RMB center, Yip suggested.
To create a more conducive environment to CTC operations, Hong Kong has amended its tax regime to allow the deduction of interest expenses when calculating profits tax for intra-group financing and the profits tax was reduced by half for specified treasury activities to 8.25 percent for qualifying CTCs, Yip said.
In addition, Yip said Hong Kong is proactively negotiating additional double taxation agreements (DTAs) with other jurisdictions, with many already offering lower withholding tax rates than regional peer, Singapore, including Hong Kong’s DTA with mainland China.
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CTC market share
Since the Asian financial crisis, Hong Kong has progressed in terms of financial infrastructure and regulatory frameworks, argued Jeff Kwan, Treasurer, MTR Corporation, citing the recent CTC ordinance.
Hong Kong’s liquidity has also improved significantly for not only HKD and RMB but also USD, and can also outlast the end of quantitative easing as the local fund management industry grows, Kwan said.
The increasing liquidity in Hong Kong and around the region for USD means companies like Hong Kong’s MTR do not have to go to Europe or New York for a USD bond deal, Kwan explained.
The importance of Hong Kong as a CTC has increased as investment into China has grown, according to Allen Leung, Executive Member, IACCT, and member of the corporate treasury development working group, Treasury Markets Association.
Most countries in the region have opened up markets and currency controls, but while recent volatility has pulled that back, Leung believes the trend towards open markets will continue.
Multinationals will invest in CTCs once their investment in Asia has grown to a larger size, Leung explained.
Meanwhile, Chinese companies expanding abroad will use Hong Kong as a testing ground to learn how to manage control and compliance for overseas treasuries, he added.
Singapore has successfully invested in talent and regulations and its market share of CTCs has grown, Melvani noted. However, Hong Kong is working to capture Belt and Road funding out of China and is taking steps to gain CTC market share, Melvani said.
Best practice for centralization
The major challenge for corporations is to identify the right structure of their CTCs, Yip pointed out. Corporations should not solely focus on the tax incentives, but also on their business needs and stages of development, she added.
Once a firm decides to centralize, a clear treasury policy is required to work through the steps to streamline supply chain finance and credit hubs, Melvani suggested.
Ten years ago when global retailer DFS moved its headquarters to Hong Kong, the firm switched to a centralized treasury, explained Kenneth Ng, Director and Corporate Treasurer for DFS Group.
After aggregating the bank balance information, DFS centralized funding and created a single exchange to better manage its FX exposure, Ng said.
All funding is currently handled at the corporate level in order to deal with FX exposure risk, but buy-in and operational streamlining took a few years, he added.
Refining the CTC model
Kwan believes the MTR Corporation’s investment structure does not lend itself to centralization.
Each of its foreign projects has a different and distinct ownership and cash flow structure and currency needs, so homogeneous financing does not make sense, Kwan said.
Managing banking relationships with many different relationship banks is another key focus for companies pursuing a CTC, Patrick Chan, Head of FX Market Development, North Asia at Thomson Reuters, said.
With the factors supporting treasury centralization appearing set to continue, corporate treasurers in Asia are likely to further refine the CTC model in partnership with regulators in Hong Kong and elsewhere to gain efficiency and reduce regulatory burdens.