Treasurers Cash Management Practices in … 2 Treasurers’ cash management practices in mainland China Today’s presenters Marc Monyek Senior Manager, EY Financial Accounting Advisory

Treasurers’ cash management practices in mainland ChinaIn-depth fundamentals to help build an effective cash management structure

Page 2 Treasurers’ cash management practices in mainland China

Today’s presenters

Marc MonyekSenior Manager, EYFinancial Accounting Advisory Services Global Treasury Services

Paul A. Garza Staff Consultant, EY Financial Accounting Advisory Services Global Treasury Services


Poll 1

Which of the following do you or your company identify with?A. Multinational companies that have treasury operations or a business function in mainland China

B. Companies that are considering about going into China and setting up a regional operation

C. Individuals who have interest or are conducting business research in China

D. Individuals or employees who have treasury background in China or Chinese business understanding

E. None of above — other


Steps to develop leading cash management practices

Guidance

12

3

4

Challenges in China

Cash management

Policies and reforms


Mainland ChinaCountry and currency background

Country backgroundGDP per capita (World Bank) 8,027.7 USD (2015)World GDP rank (World Bank) 2nd (2015)Standard & Poor’s credit rating AA– (Stable, 2016)

Renminbi internationalization ► RMB as a global trade, investment and reserve currency ► Regulated interest rate and exchange rate

► Continuous steps to liberalize► Current account (daily business transactions)

► RMB is not a fully convertible currency, but most of the transactions are generally done without restrictions on the flow in and out of China.

► Capital account (investment and loan transactions)► It is not yet liberalized; it is still remained closely regulated and

requires approval from State Administration of Foreign Exchange.

Source: SWIFT Watch (RMB Tracker)

RMB’s share as an international payments currencyCustomer initiated and institutional paymentsMessages exchanged on SWIFT based on value.


Cash management focus

OpportunitiesWhat treasury opportunities in China can companies from diverse backgrounds leverage?

ChallengesWhich cash management-related areas pose major challenges to treasurers?

AssessmentDo you anticipate China to be an integral part in your company’s business over the next five years?


Cash management objectives and supportCore components that impact business functions

Business planning

► Acquisitions► Funding needs► Liquidity strategy

► Reconciliation► Budgeting► Financial statements

Corporate accounting

► Financing► Repayment obligations► Credit facilities

Debt management

Investment management

► Principal preservation► Higher returns planning► Efficient use of funds

Minimize cash

balances

Effective control of cash

Cash outflows

objectives Cash management

objectives

Concentration

Funding andliquidity management

Forecasting

Technology

Information gathering, analysis, control

Inventory levels Receivables

Disbursement


Cash management fundamentalsPractical areas that are performed on a daily basis

Planning future cash requirements

Liquidity levelsVisibility of cashTime horizonsCoordinationPlanning

Establishing banking structure

Physical poolingNotional poolingHybrid poolingAutomationBank relationships

Building cash culture

Liquidity resourcesExcess/idle cashNetting systemsTransfer pricingForeign exchange

Cash strategiesCash poolingCash flow forecasting

Optimization of cash management structure

Sustainability


How do we translate cash management and strategies from the US to China?

Identify critical needs

Implement plan and test

* Trial and error and operations

assessment

Stabilize cash operations

Result

Solution

Objective

Problem

1

2 3

4

Cash management in ChinaPotential difficulties:► Knowledge gap and unfamiliar market► Multiple regulations and uncertainties► Stress threshold and adaptation

Cash management in the USExperience:► Mature process and technology► Advanced concepts and methodologies► Bank support and transparency

Transitioning point

* Trial and error may be partially avoided by learning from other companies and how they addressed challenges.


Treasurers’ cash management challenges in mainland China

Banking

► State Agency for Foreign Exchange (SAFE) and People’s Bank of China (PBOC) requirements

► “Window Guidance”

► Multiple accounts and outflow restrictions

FX management

► Currency and capital controls

► RMB internationalizationpolicy setbacks

► Hong Kong strategy –CNH market

► Currency volatility risks

Liquidity planning

► Difficult integration of liquidity position in China within a regional or global structure; time-consuming paperwork and extensive approvals

► Intercompany transaction policy developments

Capital markets

► Understanding of investment productsand local parameters

► Market developments and financial restructuring

► Credit-worthy counterparties and quality

Cash management

► Challenges in optimizing cash management structures, cross-border sweep and netting

► Trapped cash and visibility of cash

► Working capital and cash forecasting structure


Treasurers’ cash management challenges in mainland China

Operating risks

► Widespread fraud and cyber attacks

► Governmental challenges and market access

► Lack of legal protection and “right” to conduct business

Funding operations/banking► Limited funding

options for short-term needs

► On-shore money market reforms and guidelines

► Trade financing

► Bank relationships: Chinese and Western providers

Regulatory

► Financial markets and Free Trade Zone reforms

► State Council, PBOC, and SAFE issue regulations, but interpretation and execution varies between provincial authorities and banks

Payment/clearing systems► Diverse, complex

payment systems

► No single approach with collections and disbursements; cash is still commonly used

► Relationships with vendors and third parties

Treasury technology (ERP, TMS)► Permitted technology in

compliance with Chinese Generally accepted accounting principles (GAAP) and software requirements

► Rigid policies on information security

► Control mechanisms, limited internet banking


Financial sector, customs clearance and shipping routes to Africa and Europe

Free Trade Zones (FTZs) ► Marketplaces that boost cross-

border trade, investment, and pooling

► Tax policies, incentives andduty free warehouse

► Promote internationalization of RMB

► Each region has their own business characteristics and role to help deepen reforms

► Currently, there are at least 15FTZs total

Guangdong — FTZ

Financial leasing, shipping, Jing-Jin-Ji structure, and high-endmanufacturing

Tianjin — FTZ

International trade, financial sector

Shanghai — FTZ

Trade with Taiwan, production services and high-end service sector

Fujian — FTZ

Free Trade Zones — cash operation strategyCash pooling, FX conversions, tax, and investments


Chinese main regulators

Regulator Background Authority

The People’s Bank of China (PBOC)

The People’s Bank of China (PBOC) is China’s central bank and a primary Chinese regulator.

► Formulates and implements monetary policy

► Maintains the banking sector's payment clearing and settlement systems

► Manages official foreign exchange and gold reserves

► Oversees the State Administration of Foreign Exchange (SAFE) for setting foreign-exchange policies

State Administration of Foreign Exchange (SAFE)

SAFE is a government agency that is responsible for regulating foreign exchange market activities and transactions in both the current and capital account.

► Promotes the development of foreign exchange market

► Provides PBOC with recommendations for structuring China’s exchange rate policy


Key regulations in mainland ChinaPBOC and SAFE — guidance questions

► What current steps has PBOC taken to improve the infrastructure of RMB internationalization?

► How will PBOC enhance market confidence in RMB under the Current Account?

► What are the current delays for PBOC from achieving reforms?

► Will future changes in SAFE’s policies drastically impact on forex market and previous cross-border M&A deals?

► How far will SAFE relax or tighten its currency controls?

► How much impact will SAFE have on repatriation and profits?

The People’s Bank of China State Administration of Foreign Exchange


Key policies and reforms in mainland ChinaThe People’s Bank of China (PBOC)

ApprovalJul. — RMB allowed to be a cross-border settlement currency(pilot program with 365 participants)

Simplification► RMB cross-border settlement

process and automation (current account items)

Expansion► RMB cross-border flows► Free Trade Zones

ApprovalSep. — China State Council officially launched Shanghai Free Trade Zone

Opportunities► Ability to structure efficiently

cash functions and sources► RMB currency integration in business

Source: People’s Bank of China, “2016年人民币国际化报告” (2016 RMB Internationalization Report), Annual Reports — “Major Rules and Administrative Documents”

RMB cross-border settlement development (current account items)

RestructureJul. — The use of RMB to settle cross-border trades was extended to the entire country

RestructureMar. — Relaxation of RMB cross-border trade settlement for all transactions

ApprovalFeb., Nov., Sept. — RMB cross-border cash sweeping (Shanghai) and pooling (nationwide) allowed and expanded

RMB cash sweeping schemes RMB capital outflows tightening, RMB devaluation

NoticeJan. — Restricted cash poolingJune. — Partially lifted ban

ApprovalAug. — Intercompany lending allowed; end of using entrustment loans

2009 2010 2011 2012 2013 2014 2015 2016

ApprovalSep. — First foreign-issued dim sum bond by a nonfinancial company was issued by US fast-food chain, McDonald’s


Key policies and reforms in mainland ChinaState Administration of Foreign Exchange (SAFE)

Market-stabilizing measures► Steady control of capital outflows► Keep financial system intact

Currency convertibility► Expected trend to ease restrictions

on the currency controls system► Make international

transactions easier

Flexibility► Steps to allow companies to

access new RMB and FX management tools

Source: State Administration of Foreign Exchange, Annual Reports — “Major Rules and Administrative Documents”

Note:SAFE regulates four types of cash transactions: ► Inbound payments, outbound payments,

conversion of foreign currency into RMB, and conversion of RMB into foreign currency

StabilizeJan. — Ordered banks in some trading hubs to limit dollar purchases in attempt to stem capital outflows. Vetting transfers abroad worth $5m or more and is increasing scrutiny of (approved) major outbound deals

RMB transactionsvetting and capital outflows tightening

ApprovalJan. — Improved and adjusted Foreign Exchange Administration policies under the capital account

ApprovalJan. — Rolled out nationwide the pilot program of the cross-border foreign exchange payment facilitation business of payment institutions

Series of currency controls system reforms (current and capital accounts)

ApprovalJan. — Classified FX market makers into three types to increase liquidity in China’s foreign exchange market and boost its development: spot, forward, and swap

Approval Feb. — Simplified and improved policies for Foreign Exchange Administration of Direct Investments

2009 2010 2011 2012 2013 2014 2015 2016


What do PBOC and SAFE policies and reforms mean for your cash operations in China?

Improved cash operations

In China

Key regulations Effect

Currency controls

Opportunities

Liberalize RMB in current and capital accounts

Allow RMB liquidity management with overseas affiliates within FTZs

Greater liberty to manage RMB cash

Simplified cross-borderpayment process

Efficiency

Managing credit risk, liquidity needs andfunding costs

Facilitate multiple forms of payments

Improve efficiency by allowing paperless solutions/automation

Simplification of supporting documentation requirement

Cross-border liquidity management (pooling)

Feasibility

Address the issue of trapped cash in China

Incorporate China into the global liquidity structure

Greater flexibility in using RMB and FX transactions in business

Reduce the need for approvals and investigations

Cash management implications in China

RMB Internationalization

Benefits

RMB as a settlement currency for cross-border transactions

Ongoing steps to make RMB as the most traded currency

Reduce onshore exposure and integrate RMB as a main currency

Improve relationships and terms and conditions with Chinese counterparties

Expand companies’ ability to convert and transfer currency


Poll 2

What are some of the challenges in China that your company is currently facing?A. Regulation interpretation and guidance

B. Cash management/pooling structure

C. FX volatility

D. Chinese/international banking support and services

E. Technology selection and implementation


Cash management guidanceAreas of focus for analysts, cash managers, and treasurers

RMB risk managementTechnology

Managing RMB cash Cash strategies

Bank account management


Cash management, liquidity planning, and funding


Adopting RMB as a settlement currency Making this an integral part of cash management strategy

OpportunitiesPayment for goods and services, intercompany loans, offshore access to RMB services and hedging foreign exchange exposure1

23

456

Access to new suppliers and customersBuild strong relationships with onshore Chinese partners

Relaxed restrictionsOngoing reforms to make RMB a global trade currency, investment currency, and reserve currency

Reduce financial risks Tools to hedge RMB exposure as its use in international trade increases

Leverage on pricesUse of RMB to settle transactions can improve a company’s leverage on competitive pricing with customers and suppliers

SavingsRMB trade settlement and foreign exchange hedging can help generate savings


Payment systems in China

Main interbank payment and clearing systems

Systems

Overview of systems

Regulatory oversightPeople’s Bank of China (PBOC)► Complete oversight of all payment

systems

Payment and Clearing Association of China (PCAC)► Self-regulatory body of the payment and

clearing industry

Cross-border Inter-bank Payment and Clearing (Shanghai) Corp. Ltd.► Operate China International Payment

System (CIPS)

China National Advanced Payment Systems Large

Value Payment (CNAPS-LVPS, CNAPS II)

CNAPS Bulk Electronic Payment System (CNAPS-BEPS)

Local Clearing House systems (LCHs)

Real-time gross settlement for high-value and urgent

electronic payments

Main clearing system for low-value electronic

retail payments

Regional payment systems (clear all paper-

based and debit payments)

Settles foreign currency payments (AUD, CAD, CHF, EUR, GBP, HKD,

JPY and USD)

Processes RMB cross-border payments

China Domestic Foreign Currency Payment System (CDFCPS)

China International Payment System (CIPS)

Notes:* China has diverse and complex payment systems. There is no single approach with collections and disbursements; cash is still commonly used.* There is a higher rate of payment rejection via using the systems above due to insufficient information. It is important to provide all details, including CNAPS Bank Code, purpose of payment and specific formatting of a payment.


Cash management models in ChinaHow modern technology fuels a progression of cash operations structure

► Daily cash management (cash positioning, short-term needs)

► Bank account► FX exposure management► TMS, ERP

► Cash sweeping schemes► Formalized control of

payments and collections► Formal policy on

investments and liquidity on the national level

► Integration of liquidity position in China within a global structure

► Treasury management assessment

► Treasury system review

► Manual work, such as Excel or paperwork, is used for reporting and cash flow forecasting

► Payments and collections are managed locally

1. Rudimentary cash management processes

2. Controls, policies and automation

3. Regional structure and expansion

4. Global liquidity consolidation


RMB cross-border sweep exampleLiquidity planning strategies

RMB cross-border lending account

Primary bank concentration account/RMB pool header account

Foreign currency account



RMB account/primary bank branch China



Cross-border sweep

Lending Cross-border sweep

Borrowing

Insi

de C

hina

Out

side

Chi

na

Existing bank account

Cross-border bank account

RMB regional borrowing account (outside of China)


Liquidity and funding tools in ChinaShort-term investment and borrowing opportunities

Short-term investmentInterest-bearing current accounts

Available, but interest rate is low

Demand deposits Available

Time deposits Available in RMB and FX currencyInterest rate is set by PBOC

Certificate of deposit DevelopingNew guidelines

Money market fund Available and higher interest rates, but ongoing reforms, liquidity risks, high costs, authorities seek to slow down redemption

Treasury (Government bills) Available for Qualified Foreign Institutional Investors (QFII)

Commercial paper(corporate bills in China)

DevelopingNot available for FIEs

Repurchase agreements Available, but uncertainties and potential counterparty risk

Bankers’ acceptance bills Not commonly used

Short-term borrowingBank overdrafts Available, but lower rates are preferable

in Hong Kong

Bank lines of credit and short-term loans

3–12 month termsLoan Prime Rate (PBOC reference)

Trade financing Available

Factoring (accounts receivable finance)

Not normally used

Money market Available but low liquidity, high borrowing costs and credit risk

Commercial paper(corporate bills in China)

Available but low liquidity and risksOngoing reforms for a centralized national bill market

Bankers’ acceptance bills Available

Supplier credit Depending on terms and conditions

** Intercompany borrowing PermissibleMay require SAFE approvalFlexibility vs. efficiency

Notes:* Each Chinese bank may have additional and local requirements.* Some markets may be unstable due to PBOC’s abrupt tightening of monetary policy and decision to prioritize risk control starting in 2017.* Although there are tools available in mainland China, Hong Kong banks may have better offerings for companies to manage RMB cash efficiently.


Bank account management


Big Four state-owned commercial banksFormerly specialized banks, commitment to RMB internationalization

Big Four bank services► Bank of China► China Construction

Bank

► Industrial and Commercial Bank of China

► Agricultural Bank of China

Provides international commercial banking and financial services through the following segments: corporate banking, personal banking, treasury operations, insurance and equity investments.

Source: Annual reports issued by banks. Data is reported in local currencies and converted to USD using Central Banks’ end of period exchange rates (12-31-2015).Data above is only for discussion purposes with regard to market presence in China and is not to be considered an official citation of the bank listing.

Top 12 local Chinese banks in China by total CNY assets (billions) in 2015

Position Province HQ Bank Total assets1 Beijing Industrial and Commercial Bank of China 22,210 2 Beijing China Construction Bank Corp 18,349 3 Beijing Agricultural Bank of China 17,791 4 Beijing Bank of China 16,816 5 Beijing China Development Bank 12,620 6 Beijing Postal Savings Bank of China (PSBC) 7,296 7 Shanghai Bank of Communications 7,155 8 Shenzhen China Merchants Bank 5,475 9 Fuzhou Industrial Bank Co Ltd 5,299

10 Hong Kong China Citic Bank Corp 5,122 11 Shanghai Shanghai Pudong Development Bank 5,044 12 Beijing China Minsheng Banking Corp 4,521

Top 15 global banks by total USD assets (billions) in 2015with foreign or domestic presence in China

Position Country Bank Total assets1 China Industrial and Commercial Bank of China 3,420 2 China China Construction Bank Corp 2,826 3 China Agricultural Bank of China 2,740 4 China Bank of China 2,590 5 Japan Mitsubishi UFJ Financial Group 2,454 6 UK HSBC Holdings 2,410 7 USA JPMorgan Chase & Co 2,352 8 France BNP Paribas 2,171 9 USA Bank of America 2,144

10 China China Development Bank 1,943 12 USA Wells Fargo 1,788 13 Germany Deutsche Bank 1,774 14 USA Citigroup Inc 1,731 11 France Credit Aricole Group 1,665 15 UK Barclays PLC 1,660


Resident vs. nonresident entities in ChinaBank account opening — current restrictions

► RMB accounts can be opened outside of mainland China, particularly in Hong Kong and in other jurisdictions (Singapore, London) as well.

► Foreign companies do not need to have a legal entity established in mainland China or in Hong Kong to open an offshore RMB account.

Resident entities

Yes

Yes

Yes

Yes, but this needs approval from SAFE

Nonresident entities

Yes, but this needs approval from PBOC

Yes

Yes, but this needs approval from PBOC

Yes

Onshore renminbi

Onshore foreign currency

Offshore renminbi

Offshore foreign currency

Note: Each Chinese bank may have additional and local requirements.

Offshore RMB bank accounts

1

2

3

4


RMB and FCY account type and features

Renminbi (RMB) accounts

RMB basic account ► Conduct settlements and make cash transfers ► Can open only one RMB basic account

RMB general account ► Conduct non-cash settlements► Multiple accounts permitted, no withdrawals► E.g., use the account for local and provincial taxes

RMB special account ► Manage and use funds for specific purposes within the laws

► E.g., securities transactions settlement funds

RMB temporary account ► Only for temporary needs► Needs to be used within a specified time period

Foreign Currency (FCY) accounts

FCY settlement account ► Manage foreign currency operating transactions

FCY loan account (local) ► May apply for domestic foreign currency loans

FCY loan repayment account

► Handle loan principal and interest repayment

FCY capital account ► Manage foreign exchange capital


Banking services in ChinaTreasurers’ top criteria for bank selection and services

Bank selection

Technology Location

Bank services

Features Tools► Branch network in China

► Expertise of staff on banking in China

► Global network outside of China

► Work with local Chinese banks

► Offer credit

► RMB clearing centers

► Opening RMB or offshore CNH account

► Electronic banking capabilities

► Ability to execute domestic payments and meet payment timing

► Ability to handle payments and FX

► Cash collection, concentration and flexible schemes

► Domestic electronic payments or receipts

► Domestic check payments or receipts

► Payment processing and FX

► Card payments or receipts

► Collections

► Electronic reporting

► Payroll services

► Trade finance and LCs

► Specialized services (intercompany lending, cash sweeping schemes)


Technology


Considerations when selecting a TMS or ERP to use in China

Cash flow forecasting

Financial risk management

Reporting Liquidity management

Customer

Cash management

Bank account structure

► TMS► Continuous trend toward TMS adoption► Host solutions, bank proprietary systems ► Both domestic and international providers

of TMSs are available in China

► ERP► High visibility across the company► Efficient retrieval of data► Audit trail more standardized and manageable

TMSERP


Additional thoughts to consider about TMS

► Does the TMS meet the minimum functionality and accounting requirements in all regions of China where the company conducts business?

► Is the TMS robust enough for global trade management?

► Is the TMS’s geographic information system continually updated?

► Can the TMS capture accurate, timely and transparent data?

► If your company decides to adopt TMS, will it greatly benefit from a TMS vendor or Chinese bank proprietary systems?


Poll 3

Are you planning to integrate China into your global treasury structures in the next five years for liquidity and risk purposes?A. Currently working on changes now

B. Plan to work on this next year

C. Plan to execute this strategy within five years

D. Need further clarification and third-party support

E. Do not plan on making changes


RMB risk management


Chinese currency ratesCurrency background

► CNY ¥ (Chinese yuan, renminbi)

► Onshore (CNY)► Rate set by People’s Bank of China (PBOC)

► Offshore (CNH)► Freely floated rate

► Significant influence by PBOC to stay close to CNY

► CNY and CNH both have their own separate buy, sell and mid-market rate.► Trading band +/– 2%

► Part of the Special Drawing Right (SDR) Currency Basket

Source: Bloomberg (historical rates)


RMB currency risksMonitor the direction of RMB and take steps to mitigate risks

Market analysisRisk management toolsDecision between CNY and CNH► Spread between CNY and CNH► Determining the best rate

Natural hedges► Natural way to reduce exposure

Liquidity instruments► Efficient way to manage excess cash

RMB derivatives► Hedging program ► CNH-denominated foreign exchange risk management tools

► FX options, forward contracts or non-deliverable forwards (NDFs) to reduce currency fluctuations and minimize the risk of loss

Clear accounting guidance ► One internal booking rate for accounting purposes (CNY, CNH)► Avoid internal FX complications

Source: Bloomberg (historical rates)


Thoughts, objectives and next steps


Next steps in treasurers’ journey

► Develop a Greater China cash management strategy► Internationalization of the renminbi (RMB)► Hong Kong, Singapore and London

(Offshore CNH markets)► Tap into China’s capital markets

► Reassessment► RMB cash sweeping schemes, hedging

program, bank account structure

► Upcoming challenges► High-level action plan

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