This year continues to be an interesting, exciting – but also challenging time for companies to have a presence in China.
Despite a prolonged period of more muted GDP growth following three decades of double-digit growth, structural concerns over an ageing population, a housing market bubble, a large government deficit and the impact of the trade standoff with the US, China continues to be a land of significant opportunity for foreign investors during 2018.
China is the world’s second-largest economy behind the US by nominal GDP and is the world’s largest manufacturing economy and exporter of goods.
It also represents the world’s fastest-growing consumer market. The sharp increase in the rate of urbanisation towards China’s coastal areas and top-tier cities, combined with the rapid emergence of a wealthier, more individualistic and more sophisticated middle class of consumers in China, has created unprecedented opportunities for the companies serving their needs.
Nowhere else is the value of good banking relationships more crucial
Taking Costa Coffee as an example of a consumer business targeting this emerging class of consumers, the company has targeted investment in Shanghai and Beijing, focusing its product offering on high-quality service, brand and delivering a ‘Western’ customer experience.
Changes in the treasury and banking landscape have served to facilitate foreign investment into China, and the direction of travel has continued to be towards relaxing controls in order to stimulate investment and growth.
The renminbi is still subject to exchange controls, managed by the State Administration of Foreign Exchange (SAFE), but the role of SAFE has evolved over time from that of ‘micro-controller’ to one of ‘macro-supervisor’, with a simplification in regulatory procedures and improvement in administrative efficiency.
Investing capital into China is now relatively straightforward, as long as the correct clearances have been obtained and processes followed, and the cash is paid into a dedicated capital account.
Moving funds cross-border out of China continues to present challenges even in these days of renminbi internationalisation, as the currency is still not yet fully convertible, and there are still certain restrictions around cross-border flows.
Companies need to consider carefully how to structure and fund their operations in China, to achieve flexibility in cross-border cash flows and avoid the risk of trapping cash, while at the same time maintaining balance-sheet strength and appropriate capital structure.
There are generally no restrictions on the payment of dividends from China to overseas parents, albeit these are subject to withholding taxes.
Similarly, the settlement of trade invoices cross-border is generally unrestricted.
The emergence of cross-border cash-pooling arrangements, including those within China’s Free Trade Zones, has provided an additional channel for onshore Chinese subsidiaries to channel funds offshore and manage working capital flows between overseas parents and Chinese subsidiaries.
The creation of offshore renminbi bond markets, as well as facilities offered by banks within China, offers a diverse and competitive market for borrowers of renminbi, allowing companies to borrow locally to fund their operations in China, the servicing of the loan interest offering an alternative to repatriating cash cross-border.
One of the main challenges faced by corporate treasurers in navigating treasury in China is the constantly changing and evolving regulatory landscape and the fact that it can be difficult to stay up to date on current rules and requirements, especially as these rules can change so quickly, can vary significantly across different regions of China, and are often not clearly documented or accessible.
In no other country is the value of good banking relationships more crucial. Where rules change so quickly and there is limited published guidance available, the role of the banks is paramount when it comes to navigating often complex rules and regulations.
The banks are also key in interpreting these regulations and advising on the practical application of them in the real world.
Working within an organisation that is investing in China, the most significant concern from a treasury perspective is this uncertainty around the regulatory landscape; maintaining agility, planning for change and communication with banks are all therefore key to success.
Jill Harrison FCT is group treasury manager at Whitbread
This article was taken from the October/November 2018 issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership