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Treasury netting has room to grow in Asia as businesses expand and managing payments across various different entities become a challenging task for any seasoned treasury team.
Used as cash management tool, netting typically involves the creation of an internal netting centre, which is charged with netting off intercompany transactions between different subsidiaries of the same group.
While netting has become the industry standard for large corporations in developed markets, it still has room to grow in emerging markets where financial regulations still hamper the movement of funds. In China, the government has made gradual progress in terms of allowing cross-border netting for both renminbi and foreign currencies.
In August 2015, China’s SAFE (State Administration for Foreign Exchange) allowed companies to setup an onshore FX account that could, among other things, allow current account expenditure from onshore to offshore subsidiaries.
As a result of the relaxation of financial regulations, several companies have begun to implement a netting solution for their Chinese units. Last September Bosch executed its first cross-border renminbi netting transaction. The solution is expected to significantly benefit the company’s Global Netting Centre (GNC) by reducing the number of payment actions and providing better liquidity across the Bosch Group.
Aware of the growing trade between China and Korea, Samsung, prior to Bosch, also put in place its own cross-border renminbi solution. Through the new scheme the company achieved additional visibility on their payments processes, which allowed for working capital optimization.
In addition to lowering treasury-operating costs by bundling payments and simplifying settlements between internal/external trading partners, netting can also be used to reduce FX risk.
Since all transaction information is sent to a company’s GNC, all FX transactions of a company are centralized within one entity. This means that FX exposure is no longer tracked at a subsidiary level, as the corporate parent offsets counts receivable and payable against each other to determine the net amount of foreign exchange transactions that actually require hedges.
Despite the potential benefits of netting for a company’s treasury department this cash management strategy is still only just gaining traction amongst Chinese multinationals. Nonetheless, with the increase of additional multinational renminbi cross-border netting solutions, expect Chinese corporates to soon follow in the footsteps of their foreign counterparts in establishing a GNC.
5 Jan 2017