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Case Study: Texhong RMB International Liquidity Management

The case study below is based upon an entry that won the Global Treasury category at the gtnews Awards 2014:

Texhong Textile Group is one of the leading Chinese domestic cotton textile manufacturers and distributors. It has overseas operations in Vietnam, Macao and Hong Kong and 1,600 global customers in diverse markets ranging from Europe to South Korea, and Bangladesh.

It has recently implemented a cross-border auto-sweeping solution, with the assistance of its banking partner Citi, which eliminates the need to borrow money externally to support day-to-day working capital needs, as it allows money to be circulated more easily internally within the group across international borders.

The new group-wide renminbi (RMB) liquidity management solution allows for the utilisation of excess cash positions in China to fund Texhong’s global expansion efforts, not to mention increasing the firm’s operational efficiency through enhanced liquidity reporting with balance information.

The Problem

Texhong’s ambitious growth plans were previously being inhibited by having to manage its Chinese liquidity separately from its overseas working capital requirements. In order to solve this problem the corporate treasury started working with Citi last year to launch what it says is the world’s first automated renminbi (RMB) cross-border sweeping structure from China. Now fully up and running, the new global liquidity management solution means the firm can move cash generated in China to their global subsidiaries on a same-day basis.

Like many Chinese companies, Texhong historically managed domestic liquidity and overseas working capital requirements separately. This was largely due to the restrictive regulatory regime governing cross-border RMB flows. This set-up meant that it was unable to use excess cash from its domestic operations to fund the working capital requirements of its overseas subsidiaries, leaving it with a fragmented and highly inefficient financial arrangement. The liberalisation of the regulatory regime surrounding RMB and its increasing internationalisation presented the corporate treasury with an opportunity to change this.

The previous segmented operating model was unsustainable in the long term and exposed Texhong to significant risks, such as rising costs and changes in interest rates. The priority was to mitigate these risks and establish an efficient cash management and liquidity solution that could keep pace with – and assist – Texhong’s ambitious international growth plans.

The Solution

The automated renminbi (RMB) cross-border sweeping structure that was introduced with the assistance of Citi to solve Texhong’s problems now means the company’s overseas and domestic liquidity structures are combined. This has created significant benefits in terms of cash management efficiency and a reduction in external funding costs. It has also had the benefit of reducing the firm’s exposure to interest rate-related risk.

Texhong says it is now the only Chinese company with the ability to automatically mobilise cash generated in China to its global subsidiaries on a same day basis, giving it significant competitive advantage over rival textile companies with the same trade flows. Specifically, the cross-border auto-sweeping solution has enabled the corporate to enhance their treasury operations in the following areas:

  • Reduce external funding costs: With the ability to optimise liquidity on a daily basis, Texhong has eliminated the need to borrow externally to support day-to-day working capital needs. It financial performance has improved considerably as a result.
  • Global cross-subsidy support for its growth plans: By integrating the domestic and the global liquidity structure, Texhong is now able to use its excess cash positions in China to fund global expansion.
  • Operational efficiency: Automation has improved Texhong’s operational efficiency. Enhanced liquidity reporting with instant balance information has improved treasury visibility and performance.

Texhong is proud to be in the forefront of the increasing internationalisation of the renminbi currency. RMB is crucial to the global cash management needs of expanding Chinese companies and this project, in tandem with others like it, will facilitate the usage of RMB cross-border for trade settlements and assist its growing influence on the world stage.