Cross-border netting: Asia corporates reap rewards
The netting of payments and receivables is a cash management concept used by large multinational corporates, but has only recently caught the attention of Chinese companies.
Netting is a cash management strategy that involves the creation of an internal netting centre, which is charged with netting off intercompany transactions between different subsidiaries of the same group. As such, investments in netting will usually only prove to be efficient when the corporate operates a multitude of subsidiaries that trade with each other. For groups that fit this category, the return on investments can be significant. Rather than handling thousands of payments among interrelated parties, netting centres can bundle, cancel and streamline transactions to produce cost savings on payment fees and manpower.
As the People’s Bank of China and the State Administration of Foreign Exchange have issued several regulations to promote cross-border cash and liquidity management in the renminbi and foreign currencies, the introduction of netting has attracted considerable interest from corporate treasurers. It enables corporates to leverage the concept of centralized payment and collection to better manage their working capital, including pay-on-behalf-of (POBO) and receive-on-behalf-of (ROBO), and the netting of transactions between intercompanies and third party companies.
Netting offers benefits – from simplifying settlements between internal and external trading partners to helping reduce the funding cost significantly.
There have been pioneering renminbi netting transactions involving multinational companies. Samsung Electronics successfully implemented in May 2015 the first global intercompany cross-border renminbi netting solution. Managed by Samsung’s global netting centre (GNC), the solution brings significant opportunity for more effective liquidity management and working capital optimization for the company.
Bosch, which has a GNC in Germany for cross-border settlement transactions among intra-group companies, executed in September its first cross-border renminbi netting transaction. The solution is expected to significantly benefit its global treasury operations with improved transaction costs due to the reduced number of payments, better global liquidity management across the group and minimized onshore FX exposure by centralizing FX management into its headquarters in Germany. At the same time, its China subsidiaries are now another step closer to full integration into its global treasury operations.
Asset Benchmark Research (ABR) in partnership with the Bank of Communications conducted a survey on corporates that engage in cross-border netting. The survey is part of a broader report on treasury, Treasury in Practice – Risk management, netting and outbound M&A, led by ABR and Bank of Communications.
The majority of the corporates (46%) that responded in the netting survey are located in Hong Kong. Thirty-seven percent of respondents are in Singapore and 17% in the rest of Asia. Only 38% of respondents operate a GNC for their intercompany receivables and/or payments. The single biggest benefit of operating a GNC is lower operational costs, according to 78% of corporates that run one. The annual savings range from US$10,000 to US$500,000 or an average of US$330,000.
One corporation that lowered its operational cost with the help of a GNC is a multinational chemical manufacturing corporation with regional headquarters in Hong Kong. It is now trying to include their onshore entities in China in the group’s netting arrangement, which it describes as a difficult exercise. The company is facing regulatory issues and the arrangement is taking a lot of time. But it hopes regulators will streamline documentation process.
A multinational engineering firm with a Hong Kong-based company has been operating netting globally for more than 15 years. In its intra-group “cleaning”, the payables and receivables are actually netted. Payments are cleared without the exchange of physical assets except in countries with central bank regulations that do not allow netting.
A global brewery with a Hong Kong office does netting for its operations in Asia-Pacific, particularly in Australia, but not in markets where control policies on cash are strict such as in some Southeast Asian and Indian markets where it operates.
A company providing market expansion services in Asia achieved lower operational costs and improved cash visibility after it slowly expanded its GNC. The cost benefit of operating a GNC is over US$500,000 yearly. The company included its onshore China entities in its group netting arrangement. It would have wanted to grow its GNC channels, but netting isn’t allowed in certain markets. Netting becomes more complex given the uncertainty around the banking sector. The company will have to deal with more than one or two core banks as a result. Onerous documentation requirements is also increasingly a problem for the company. In certain markets, netting entails multiple forms and documents that need filling out.
A global pioneering technology company with a branch in Singapore started operating a GNC in 2008. That cut operational costs and transaction banking fees, centralized FX control and improved cash visibility. The company saves between US$100,000 to US$500,000 yearly. Its onshore Chinese entities have been included in the group’s netting arrangement since 2014.
A US multinational conglomerate that produces a variety of commercial and consumer products operates a GNC that is managed by a third party. The company, with presence in Singapore, onboarded its onshore China entities to its netting arrangement five years ago. They participate in the platform, but settle on a gross basis.
The company says it can work with a Chinese bank for its netting arrangements. But it will have to be a bank that operates globally given the company’s intercompany transactions that originate from a number of markets.
A US computer company that operates in Singapore puts its annual GNC savings at over US$500,000. It already onboarded some of its onshore Chinese entities to the netting arrangement and would have included all if not for impediments such as cost and regulations.
The company has a view that Chinese banks can do well at netting given that they’re operating in the country and are familiar with the regulations.
For a subsidiary of a European car company operating in Malaysia, implementing a group-wide netting is impractical because of FX volatility. To manage fluctuations in currencies, it locks in FX contracts. It believes operating a GNC will incur costs that may outweigh savings from netting. The company prefers to lock in contracts on a monthly basis than to net.
A food and beverage company in Singapore sees regulations as hurdles to netting. It says it may operate a GNC when governments ease regulations around netting.