Technology for Corporate Finance and Treasury in China
Until recently, most of the overseas investments in production facilities in China were made from Hong Kong, Taiwan, Japan, and even South Korea. Foreign companies wanting to enter the Chinese market, or manufacture there, acted at arm’s length through intermediaries in these other Asian countries, to avoid the regulatory and cultural obstacles to closer involvement.
China has changed so rapidly, however, that overseas organizations outside Asia are starting joint ventures (JVs), or even fully owned businesses in China. Among the most critical issues facing such companies today is the secure and efficient control of trade transactions, treasury operations and accounting procedures.
Despite the obvious difficulties of this task, we are now seeing the migration of back-office financial functions into China, to take advantage of the low cost environment, just as manufacturers have done. Some companies have made China, especially Shanghai, their regional treasury for Asia.
Some foreign manufacturers exporting from China may operate with their treasury functions either inside or outside the People’s Republic of China (PRC), and foreign manufacturers serving China’s domestic market may have treasury functions split between the multinational group and the local functions within China.
Overseas companies that have a large investment in the Chinese market need to give a high priority to carefully selecting their banks, the systems to be used for payments and electronic trading as well as the monitoring of transactions. China is on the cusp of a change from relatively primitive cash and cheque systems to financial technologies that mirror those in advanced markets. It is essential to be aware of the great disparity in financial systems available, and to choose wisely.
Foreign banks do not have adequate branch networks yet, and so they offer services via partnerships with local banks. A restriction formerly enabled foreign banks to open only one new branch per year, but this has been lifted.
Foreign companies prefer to use internet banking, or electronic banking, due to the additional security of these more up-to-date systems, and because it provides remote monitoring and control of accounts and payments.
Internet banking is available from many leading overseas banks, and about half of the Chinese banks. Local banks tend to use Chinese language screens for internet banking, so in practice most foreign trading companies use overseas banks where possible. The first overseas banks began offering internet banking only at the start of 2003, but availability of this service has been accelerated by the difficulty of opening branch networks, and the large size of the country. Customers can transfer funds, make account enquiries, check interest and foreign exchange rates and send remittance instructions. Online trading is available from most systems, but the functionality is fairly elementary.
Electronic banking previously used leased lines and was restricted to the larger corporations, but now it is available by dial-up telephone line. However, in most cases, the bank must install special software on your nominated PC, to authorize your ID and password, and therefore casual access using a laptop is not possible. A simple type of online trading is generally available.
In China, cheques have been severely restricted as a tool for business payments. The main problem is that cheques drawn on a bank within a certain province or city cannot cross the internal borders within China – so, literally, if a cheque is issued in Shanghai, you cannot draw on it in Shenzhen, or even Beijing.
A further restriction is that cheques cannot be post-dated more than seven days. That means that payment practices that are normal in Taiwan for instance, in which batches of cheques are presented to the bank for payment over the next month or so, are not possible without breaking the banking rules. As a consequence of such restrictions, far fewer individuals in China have chequebooks, and cash is often used instead.
On a retail level, ATMs, mobile banking and debit card payments are widely available and developing quickly. Direct debit payments (GIRO or auto pay) are also possible, but they are restricted to fund transfers within a single bank, rather than cross-banks through a clearing house.
Most local renminbi transactions are paper-based and documents have to be in Chinese and be officially stamped for approval. Chinese businesses transacting in renminbi with other entities within the country mostly rely on paper-based clearing, which takes 24 hours or more, but electronic clearing is available at a higher cost and is universally preferred by foreign companies and JVs.
For internal payments in renminbi, China does not have a single, integrated nationwide electronic clearing system. Instead, it has two separate systems that banks can join. The oldest and most widely used system is the Electronic Inter-bank Network (EIN), and most Chinese banks belong to it. Clearance may take six hours, or even overnight.
A more recent system, set up in January 2003 is the China National Automated Payment System (CNAPS), which clears payments in two to three hours, but the cost premium is high, and only the largest banks have joined.
As a result of these two systems, payments made in ‘first-tier’ cities, such as Beijing, Shanghai and Guangzhou, clear within a few hours using CNAPS, while those that involve more provincial locations, especially in western China, will use EIN and take longer. The clearing systems are semi-automatic, but all payments must be checked, so fax and paperwork may slow the process.
For foreign currency transactions, SWIFT is the standard clearing channel and the external banks are major institutions such as HSBC, Bank of America, ABN AMRO and Deutsche Bank, so such transactions are fast and efficient.
Factoring services from banks are much less favourable than those in Taiwan and Hong Kong, and only certain banks have the necessary licence to offer such services. The percentage of cheque value that can be obtained by the client is lower than in other countries, and collections from customers who may have paid you in other provinces or cities is complicated by the seven-day limit to post-dating. Some banks are making progress on lockbox type services, but far from what is available elsewhere.
Different business units of the same legal entity, that happen to be located far apart, may have different banking relationships, making centralized cash management almost impossible.
The segregated local tax jurisdictions can also create issues for invoicing and payment structures. For example, if you move goods between branches of the same company or JV, you may still need to pay VAT (value added tax). Such factors create complexities for the implementation of truly effective cash and treasury management practices for a corporate group.
Electronic operations offer advantages in cash management in China. Internet based systems can present an integrated picture of widely scattered resources and improve the communication flow between business units inside China and those outside, therefore overcoming the cultural, regulatory and geographical barriers to treasury operations. This is supported by some foreign banks that excel in cash management technology and can offer multi-bank reporting solutions through a partnership arrangement with local banks.
One encouraging aspect of financial communications in China is that Internet penetration is very wide in the corporate sector, and most trading companies have broadband access, while even small exporters can handle dial-up connections. This opens the door to working with electronic trade systems.
Most Internet and electronic banking systems have partially automated the trade cycle by using purchase order information to populate shipping documents and invoices, but compliance remains paper-based. These systems, developed by banks, only automate the transactions for their client, who may be a buyer or seller; they cannot deal with the other trade partner, and therefore many of the advantages of electronic payments are not available. Sophisticated trading systems that provide online trade finance and services like logistic and inspection, have not yet been developed in China. For this reason, most companies need to look outside of China for payments systems that automate the whole supply chain.
Another obstacle for the home grown electronic trading systems is customs clearance. Customs returns in China must be made on paper and signed and chopped. Electronic trading systems need to be capable of preparing such documents, and printing them in the appropriate format.
Many foreign corporations and JVs use enterprise resource planning (ERP) systems, but often these do not support Chinese, or there are difficulties in connecting English and Chinese records. These problems can be solved with technology, but solutions are often expensive.
It is easier to automate payments flowing into China rather than funds coming out of China due to regulatory issues. Companies are free to use the global web-based electronic trade platforms that automate financial supply chain management, including everything from purchase orders to the information required for payment decisions, and the payments themselves.
Chinese companies understand the importance of technology and often leapfrog their competitors from other countries by adopting the latest technology. Some companies that use western-hosted, internet-based trade process automation systems have moved 100 per cent of their international trade transactions on to them.
Treasury and finance functions are more complicated in China. Most bank staff naturally operate in Chinese and so applications for services – even electronic services such as Internet banking – may have to be duplicated in both English and Chinese. This extra work and translation adds to the time and cost of transactions. More significantly, companies registered in China need to operate an accounting system that can handle Chinese, and corporate accounts must be submitted to the taxation authorities in Chinese. That generally means preparing separate accounts in English for head office use.
Foreign trading partners generally require data in English anyway. In international trade, the use of Chinese goes against the general acceptance of English. However, in some of China’s main business hubs, skilled multilingual translators are available – for example, English speaking staff in Shanghai, and Japanese and Korean speaking staff in Dalian or Quingdao.
Despite the history of China as a state-controlled economy and the challenges in working with local banks, it is clearly possible for foreign owned enterprises and JVs to manage their trade and treasury functions satisfactorily.
The fact that there is now a trend for companies to move their back office functions and accounting and payment processing to China is a tribute to the flexibility of the Chinese banking authorities and the sheer speed of change.
It is clear, however, that for many years there will be a major contrast between local business operations, based on cash or paper-based clearing operations, and international finance that demands electronic payments and supply chain visibility. The most important lesson for foreign owned enterprises is to select the banks that use the best technology for nationwide clearing. Automated trade systems based on internet communications are a huge asset, but they must be capable of supporting, on the one hand, international multi-currency finance, and on the other hand, local Chinese suppliers that have only an elementary internet connection.