ICG Pres CTS (Letter) - Citibank...The surplus cash flow from applicants, excluding funding from...

Deborah Mur, Head of Client Sales Management, China

China: Globalization Opportunities for Corporates

March 2013

Transaction Services

Table of Contents

1. China Macro Economic Update 1

2. Leveraging Regulations and Reforms for Enhanced Centralization 6

3. Trade Finance Opportunities 18

4. Expense Controls 19

1. China Macro Economic Update

Y2012 China Macro Economy Review• The government secured a mild rebound through policy easing in 2012

– Growth rebounded from 7.4%YoY in 3Q to 7.9% in 4Q, delivering annual growth of 7.8%.Such a pace of growth was achieved through substantial policy easing, including expansionary fiscal policy, accommodative monetary policy, and accelerated investment approval and implementation. Both monetary policy and credit supply have been eased• Interest rates were cut twice last year, and broad money growth reached 13.8% YoY• Total social financing reached Rmb15.8 trillion, after Rmb12.8 trillion in 2011, suggesting easy credit

available outside the banking system• Infrastructure investment quickened in 2H as a result of the policy support, bringing annual investment

growth to 8.4%• As consumption stimulus gradually expired, growth consumption fell from 10.7% in 2011 to 8.2% in 2012

• While the growth rate exceeded the official target of 7.5%, this was the first year with sub-8% growth since 1999

Source: Development Research Center of the State Council, and Citi Investment Research and Analysis estimates.

1 China Macro Economic Update

China Macro Economic Outlook• CPI inflation is likely to remain below 2.5% in 1Q. Barring exceptional weather conditions or

animal diseases, vegetable prices are likely to return to normal and the case for rapid pork priceincreases is not strong given still high live pig inventory. YoY CPI inflation may retreat significantlyin Jan due to last year’s high base, to be followed by a jump in Feb and normalize after that

• Policies will likely remain supportive in the near-term, but may gradually shift from an easing bias to a neutral position, as downside risks decline and inflation starts to trend up. Growth may briefly exceed 8% in 1H benefiting from lagged effect of policy accommodation in 2012. However, the policy shift may bring growth back to sub-8% subsequently. We therefore keep our 2013 growth forecast at 7.8%, with some upside risks from stronger US growth over the course of the year

• The central economic work conference last December maintained the proactive fiscal and prudent monetary policy stance, while attaching more emphasis to growth quality

• Declining working age population exerts structural gravity. It has long been known that China’s working age population will soon start to decrease. The working age population fell for the second consecutive year, by 3.5 million in 2012. The trend will likely have profound impacts on the supply and cost of labour in the longer term, and put some downward pressures on China’s growth potential. Going forward, growth of below 8% may become the norm rather than exception

Source: Development Research Center of the State Council, and Citi Investment Research and Analysis estimates.


Prevailing RMB Deposit and Loan Rate • The pace of interest rate liberalization has accelerated: Since Jul 2011, the PBOC has announced two rate cuts in

July 2012. The second rate cut in 2012 also came with further liberalization on the lending rates. In our view,the government has shown its commitment to interest rate liberalization. Further relaxation on deposit rates andderegulation on loan-to-deposit ratios are likely next steps.

• Current RMB Deposit RateCiti Offering PBOC Base Rate

Current Account 0.385% 0.35%

Call Deposit (7 days) 1.485% 1.35%

3 Months 2.86% 2.6%

6 Months 3.08% 2.8%

1 Year 3.30% 3.00%

• Current RMB Loan Rate

Lower Limit PBOC Base Rate

Tenor <= 6months 3.92% 5.60%

6 months<Tenor<=1 year 4.20% 6.00%

1 year<Tenor<= 3 years 4.305% 6.15%

3 years<Tenor<=5 years 4.48% 6.40%

Tenor >5 years 4.585% 6.55%


2. Leveraging Regulations and Reforms for Enhanced Centralization

Key Challenges and Opportunities for Doing Business in China

Challenges

• Optimized liquidity management– Cash pooling across multiple entities– Too many bank accounts– Yield enhancement for excess liquidity– Lending excess liquidity overseas

• Efficient treasury operation– Which currency? – SSCs: Centralization of processes– Data processing for Chinese characters– Supporting documents for cross-border funds transfers– Account visibility across the country and banks

• Government Relationship Management– Business expansion – Keeping up with fast evolving regulations

• Other related challenges – Legal entity restructuring/simplification– Cost and retention of skilled staff– High domestic logistics costs

Opportunities

• Cross-border liquidity management

• RMB cross-border lending

• Centralization– Payment processing through SSCs

• Expense and operational risk controls– ERP integration with Bank for file delivery– Reduce manual processes– AP and AR reconciliation– Commercial Cards

• Account management—visibility

• Extension of payment terms

6 Leveraging Regulations and Reforms for Enhanced Centralization

Scope: Applies to Trade Transactions Across China

SAFE Regulation: Simplification of FCY Cross-border Settlements

WHO Qualifies?• Companies are categorized as A, B or C, depending on history

and track record with SAFE (category A as default)• The simplified process is applicable for category A companiesBenefits• Enables centralization of FCY cross-border trade processing• Faster processing turnaround• Enhanced operational efficiency

Before After

and and or orContact/PO InvoiceCustoms Slip Contact/PO InvoiceCustoms Slip

Check SupportingDocuments

Verification

PVA AC Settlement AC

PVA AC Settlement AC

Supporting DocumentsSupporting DocumentsPayment for Trade Transaction

Pain Points

• Time consuming and resource-intensive preparation of documentation

• Frequent settlement delays caused by discrepancies or incomplete supporting documents


Collection for Trade Transaction

PBOC Regulation: Simplification of RMB Cross-border Settlement

Guangzhou Pilot ProgramScope: Applies to Goods Transactions Only

Shanghai Pilot ProgramScope: Applies to Both Goods and Services Transactions

Before After

Pain Points• Supporting documentation requirements

vary by transaction, with no standardization across banks

• Time consuming and resource-intensive preparation of supporting documents

• Frequent settlement delays caused by discrepancies or incomplete supporting documents

Instruction

• Cross-border RMB description form (PBOC format)

Instruction

Invoice/Contract/

others, i.e. Tax

declaration form


Benefits• Documentation

requirement is standardized

• Easier to centralize RMB cross-border trade processing

• Settlement delays are avoided through reduced errors

• Enhanced operational efficiency

Who Qualifies? Basic Requirements Transaction Nature Record• Registered in Shanghai • Stable counterparties • Sound credit record• Cross border settlement

history of over 1 year• Stable nature, frequency

and scale of transactions• Active in PBOC

RCPMIS• Credit line over 1 year

Who Qualifies? Basic Requirements Transaction Nature

• Registered in Guangzhou • Not in PBOC’s “Monitoring Name List” for cross-border RMB settlement

• Sound credit record

Before

Instruction


After

Instruction


Invoice/Contract/

others, i.e. Tax

declaration form

Invoice/Contract/

others, i.e. Tax

declaration form

Required documents depend ontransaction typeTransaction Type Supporting Document• Prepayment• Receipt of Prepayment

Contract

• Paymenta – Tax Declared in

RMB; and sufficient Pay/Receive quota

None required; Pay/Receive against quota

b – Tax declared in FCY; or insufficient Pay/Receive quota

Tax declaration form/List of Tax Declarations for company with good reputation


Cash Pooling Solution—Flexible StructuresZBA—Concentration of cash positions Cost saving structure—Reduce physical cash movements to reduce the business tax expense

• Under Zero/Target Balancing arrangement, sub account balance will be zero or targeted balance. Funds are concentrated into the Header account

• Sweep “exact” shortage amount to cover participant account overdraft within a cash pool to minimize tax implication. No over funding within group entities. After Sweep (A): Sweep as per proportion After Sweep (B): Sweep as per priority (i.e. Sub A >Sub B >Sub C)

• Under Cost Saving Sweep, Entrustment Loan will only count either from borrowing side or lending side, while under ZBA Sweeping it counts both side. If we remove CCCL Account as an agent account, total Entrustment Loan amount will be 35, while in this case it is only 20

• Under Tax Saving Sweep, Entrustment Loan will only count either from borrowing side or lending side, while under Efficient Sweep it counts both side. If in this case change CCCL Account to a participant account, total Entrustment Loan amount will be 30, while in this case it is only 15

Zero Balance ZBA Saving

Tax Efficient Tax SavingBefore Sweep After Sweep (A) After Sweep (B) Before Sweep After Sweep

Before Sweep After Sweep Before Sweep After Sweep

0

Header

Sub A Sub B Sub C Sub A Sub B Sub C

20 10 15

Header

0

CCCL

Sub A

Sub CSub B

15

0

CCCL

Sub CSub B

5 15

15

5

0

Sub A

Header

0

Sub A Sub B Sub C

Header

Sub A Sub B Sub C

10 5 15

Header

Sub A Sub B Sub C

15 15

20

Sub A

10 (15)

0

CCCL

Sub B Sub C

105 0

0

CCCL

Sub B Sub CSub A

5 1010 5

Total Entrustment Loan Amount:5 + 15 = 20

Total Entrustment Loan Amount:5 + 10 = 15

39Shared Service CentersPayable and Receivable-on-behalf (POBO / ROBO)/Netting Settlement

PBOC Reform Project: Cross-border RMB Lending

Who Qualifies?Three Types of On-shore Lenders Are Allowed

Through this pilot project, foreign companies are permitted to lend to their overseas parent company

or affiliates through intercompany loans.

1 Foreign MNC Single Entity • Registered in Shanghai

2 Foreign MNC Pool header • Registered in Shanghai

• Regional HQ/Investment Company

3 Local Company

Pool header • Registered in Shanghai

Benefits

• Facilitates improved liquidity across group companies

• Enables more efficient use of RMB within the group and freer flow of funds

• Can be managed effectively through a centralized treasury or finance centre

Entity ARMB

OverseasChina

Entity B

Key Features

Account Maintenance

• One account with a designatedbank should be used for cross-border RMB lending, including drawdown, repayment, etc.

Lending Quota

• The quota (Q =ａ*E*P) will be approved on a revolving basis and reviewed each year by PBOC (“Q” as quota; “E” as Equity; “P” as the weighted percentage of RMB in all its operating currencies; “ａ” as the adjusted variance (managed by PBOC, initially set at 100%)

Funding Source

• The surplus cash flow from applicants, excluding funding from debt and overdraft facilities

• If the source is from a group’s RMB cash pool, no funding from the RMB special account or foreign debt account should be included

Interest Rate • Decided by the on-shore lender and off-shore borrower according to arm’s length rule

• All tax requirements to be observed

LendingTenor

• Decided by the on-shore lender andoff-shore borrower

• The tenor arrangement should be clarified in the cross-border lending agreement

Funding Usage

• Decided by the on-shore lender and off-shore borrower and clarified in the cross-border lending agreement

• It is encouraged, mainly for working capital purposes, that this fund is used for further RMB settlement transactions


RMB Cross Border Cash Pooling Structure (Future)• Cross-border RMB Pooling will be the next development in the RMB Internationalization strategy

• MNCs have two options to include China entities into regional/global liquiditymanagement structures

Cross-border RMB Physical PoolingMulti-Currency Notional Pooling (MCNP)

RMB Header AC

RMB Header AC

USD Header AC

MCNP

China

Overseas

JPY Header AC

• No credit interest

• No OD

Account in China Overseas Account

RMB AC RMB AC RMB AC

China

Overseas

RMB AC RMB AC RMB AC

RMB Header AC


SAFE Reform Project: FCY Cross-border Cash Pooling (Physical)

Who Qualifies?

• Multinational corporations with atreasury center in Beijing or Shanghai,or that have a treasury center in China with a functional treasury entity in Shanghai

Benefits

• Removes the current strict movement of cross-border FCY control on the cross-border funding movements

• Allows companies to include their Chinese entities in regional/global cash pooling

Key Features

• Special Accounts (Overseas Funding Concentration Account and Domestic Funding Concentration Account) are opened for overseas and domestic cash concentration

• Quota: (Approved by SAFE as one-off basis)– Cross-border borrowing quota = the sum of existing

quotas for cross-border borrowing for all participating entities minus utilized quota

– Cross border lending quota = 30% of shareholder equity of all participating entities minus unpaid dividends to overseas investors for the last financial year, plus profit reinvested domestically

– FX quota needs to be approved by SAFE

• Outstanding entrustment loans under domestic FCY cash pooling arrangements can be repaid by selling RMB and buying FCY

EL = Entrustment loan

Overseas Funding Concentration Account

China

China

Overseas

Domestic Funding Concentration Account

China

EL Sub AC1China

Capital AC 1China

EL Sub AC 2China

Capital AC 2China

Current AC 1China

Current AC 2China

RMB Cash Pool

FX Quota

EL Repaymentvia Sell RMB

Buy FCY

Global LM Header Account

Overseas Funding

Concentration

Cross Border Lending/Borrowing

Quota

Cross Border Lending/

Borrowing


Cross-border Intercompany Settlement Roadmap

Current Flow Stage 1:

Settlement with Off-shore Netting Center (Gross in Gross out)

Stage 2: Settlement with

Off-shore Netting

OverseasCompany A

OverseasCompany B

OverseasCompany C

Off-shore Netting Center

On-shore Company D

Border(8)

OverseasCompany A

OverseasCompany B

OverseasCompany C


Domestic FundingConcentration

Account

Border

On-shoreCompany E

On-shoreCompany D

On-shoreCompany F

(3)

(8) (5)+10

US

D

NA

RM

B

Under PBOC discussion

OverseasCompany A

OverseasCompany B

OverseasCompany C


On-shore Company D

+7(15)Border

Applies to both RMB and FCY, each entity has to settle with their

netting center

SAFE Pilot Program

OverseasCompany A

OverseasCompany B

OverseasCompany C

On-shore Company D

Border(10) (5) +7


The new regulations and reforms represent opportunities for to optimize flows .

Impact of Deregulation and Reform on Centralization Opportunities

Degree of Centralization

DecentralizedTreasury

Centralized Treasury Operations

Commissionaire Structure

Re-invoicing Center

Netting Center

Shared Service Center

In-House Bank

Treasury Flows Commercial Flows Treasury andCommercial Flows

3

1 4

1 4

1 2 3 4

Opportunities for Centralized Business Functions

• Simplification of cross-border settlement (RMB / FCY)

• Overseas RMB lending and pooling

• FCY cash pooling

• FCY POBO / ROBO and Intercompany Netting

Implications

• Greater centralization opportunities across treasury and finance, both within and outside China

• Greater integration of Chinese entities into group-wide cash and liquidity management structures

• Freer flow of RMB across the group and use of RMB liquidity

• Enhanced opportunities for operational efficiency and control

1

2

3

4


3. Trade Finance Opportunities

Extending Payment Terms using Commercial Drafts

• BAD (Bank Accepted Draft) is a Commercial Draft issued by a payer and accepted by a bank; the bank commits to pay the owner of the draft on the maturity date of the draft. According to the Rules of Electronic Commercial Draft Business Management, the acceptor of Electronic Bank Accepted Draft (E-BAD) expands from bank to both bank and finance company. In general, BAD risk is on Accepting Bank.

• CAD (Corporate Accepted Draft) is an instrument issued by a buyer (Issuer) as a commitment to pay the owner of the draft (Beneficiary or the last endorsee) at a future date, for goods/services performed. The risk assumed by the Beneficiary will be on the credit risk of the Issuer. Alternatively, the CAD may be accepted by a third party corporate (Acceptor) wherein the risk assumed by the Beneficiary will be on the credit risk of the Acceptor. According to the Rules of Electronic Commercial Draft Business Management, the acceptor of Electronic Corporate Accepted Draft (E-CAD) shall be non financial institution entities.

Commercial Draft s are negotiable instruments in mainland China, commonly used by a buyer as a paymentinstrument to settle its underlying purchase with its seller. Draft discounting is a common form of receivable or payable financing based on trade flows.


4. Expense Controls

Strategic Cost Optimization Through SSCHost to Host Business Partner Connectivity, ERP Consolidation, OCR Imaging, 3D Bar Coding, Workflow Toolsand Integrated KPI Dashboards are just some of the technologies driving automation in SSC’s today.

Consolidation of Connectivity Channels

Simplify technical solution and reduce potential failure points by replacing various bank-proprietary connectivity channels with

<single secure, robust and scalablebank-neutral network, such as SWIFTNet.

Reduce the integration effort and achieve greater consistency of services

by consolidating Treasury and SSC activity around fewer banking partners

offering wide geographical and functional footprint.

Harmonisation of File Formats

Achieve efficiency by building the process around strategic file format. This can be

either existing core format or new industry standards, such as ISO 20022 XML.

Corporate

ERP

TMSISO20022

Industry Standard Connectivity

▲Flexibility to select banking partners

▲Scalable and Interoperable

▲Single File Format

▲Single channel

Ban

kS

yste

ms

Ban

kS

yste

ms

Ban

kS

yste

ms

▼Multiple Banking Relationships

▼Expensive and Complex

▼Multiple File Formats

▼Multiple Channels

Corporate

Proprietary Bank Connectivity

ERP

TMS

PAYMUL

EDIFACT

ANSI

Host to Host

Internet Banking

FTP

Internet

Internet

Ban

kS

yste

ms

Ban

kS

yste

ms

Ban

kS

yste

ms

Centralization of treasury and operations

Automation of processing and reconciliation

19 Expense Controls

Multi-banking Overview1. H2H Linkage with Partner Banks: ABC / CCB / ICBC / SPDB / CEB2. SWIFT-based Multi-banking

H2H Solutions

1. Reporting 2. Transaction Initiation

RMB Account USD Account EUR Account

Chinese Partner banks

1. Citi sends SWIFT-based Instruction via MT101/MT103

2. Citi receives MT940/MT950

SWIFT-Based Solution


Expense Controls in China• Companies operating in China are facing expense and employee retention challenges that makes

now the right time to consider implementing a T&E commercial and/or Procurement cards program

• Local banks issue cards on a retail card platform that doesn’t provide valuable analytics

• Reduce the use of cash advances and associated risks

• Ensure compliance with Corporate expense policies

• Automate expense reimbursement process and integrate with ERP systems

• Need for company and employee-level data on spending

• Need for data on frequently used travel partners

• Attained from enhanced compliance with expense controls

• Negotiate better terms with Travel providers

20 Expense Controls

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ICG Pres CTS (Letter) - Citibank...The surplus cash flow from applicants, excluding funding from...

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