Facing A New Dawn: Liquidity Management in Asia
‘I could easily implement a Euro domestic and x-border cash concentration structure in Euroland, why can’t I do the same in Asia?’
‘Why is Asia so different (difficult) as compared to Euroland or the States?’
These are just some of the common comments and frustrations experienced by treasurers from OECD countries when they tried putting in place a Pan Asia liquidity management structure. Well, there are some truths in these comments.
From a liquidity management perspective, Asia has come a long way. The environment may be difficult but it is improving. What was once deemed impossible in some countries a few years back is now possible. The good news is that domestic notional pooling and cash concentration/physical sweep/zero-balancing can be structured in most of the Asian cities. Even in China, via the Entrustment loan structure, an FIE can leverage its internal funds between companies in different provinces. But, when we start looking at cross-border cash concentration, we are still some lights years away. With the current currency controls in most of the Asian cities in place, it is still difficult to transfer local currency on a cross-border basis. As for USD and foreign currencies, it is possible in some countries. That begs the next question: why do you need to transfer the local currency cross-border? Is this going to be cost effective and tax efficient (when you factor in WHT, stamp duty etc)?
Depending on how you look at Asia, we could for convenience put these countries into groupings based on tax and regulatory considerations. In general, these are:
Level of Regulation | Countries |
---|---|
Least Regulated | Singapore, Hong Kong, Australia, New Zealand, Japan |
Moderately Regulated | Thailand, Philippines, Indonesia, Taiwan, South Korea |
More Regulated | Malaysia, China, Vietnam, India, Pakistan, Sri Lanka |
In reality, we tend to end up with a mix of either a notional pooling structure in one country, and cash concentration in another; and in some cases, there may be a hybrid of both methods. And for some, you may have to just ‘leave it as it is’. However, for the least regulated countries (closest in nature to their OECD cousin), cross-border transfers of local and foreign currencies, usually on an intra-day basis, is possible to structure. As for the other two groupings, where in-country regulation permits, the solution might be to establish a network of non-resident accounts in a central location, usually a USD pool. Depending on where your operating locations are, Singapore and Hong Kong are two of the favorite cities among the MNCs for an RTC. Some of the selection considerations are: minimum regulatory constraints; general tax environment (such as low tax rate and access to a wide treaty network); mature and liquid financial markets; skilled resource pool.
There are checklists that all treasurers should use when deciding the appropriate liquidity management structures. I have listed some of those which I felt would be more important in the Asian context.
In recent times, many Asian tax jurisdictions have either increased tax audits and enforcement or have passed specific tax legislation on the administration of transfer pricing agreements.
In conclusion, setting up a liquidity management structure in Asia may be more challenging than in Euroland or in the States, but the considerations – regulations, tax, organization culture and structure – are the same. The environment in Asia is changing. Thus, what was once deemed impossible is now workable, and there are solutions that can and have been implemented.