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Cash Management Solutions in the China Market Possibilities & Best Practice Beijing - Shanghai - Guangzhou - Hong Kong- Shenyang – Chengdu - Wulumuqi.

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Presentation on theme: "Cash Management Solutions in the China Market Possibilities & Best Practice Beijing - Shanghai - Guangzhou - Hong Kong- Shenyang – Chengdu - Wulumuqi."— Presentation transcript:


2 Cash Management Solutions in the China Market Possibilities & Best Practice Beijing - Shanghai - Guangzhou - Hong Kong- Shenyang – Chengdu - Wulumuqi (8610) (8610)

3 Contents The Collection Cycle - Tips and Best Practice The Payments Cycle - Tips and Best Practice Liquidity Management - Tips and Best Practice

4 The Collection Cycle What Are Your Options For ETF Settlement in China? A. PBOC China National Payments Network (CNAPS) B. Settlement through traditional channel of local and/or foreign banks internal branch clearing networks

5 An Overview of CNAPs The Collection Cycle The only nationwide, independently run EFT clearing network in China Point-to-point direct transfers running on PBOC-maintained, reliable settlement system; over 20,000 direct clearing members Based on SCB client experience, 80% of the transfers arrive within 24 hours Same day arrival between CNAPS direct clearing memebers Extended network coverage based on all member banks geographic locations One standard remittance instruction for customer s buyer to remit fund, ease customer sales office administration NOTE: upgraded CNAPS to be introduced in 2003

6 The Collection Cycle

7 A - Payor account at local bank branch that is PBOC eLink member hub B - Payor account at local bank branch that is not PBOC eLink member hub, I.e. sub-branch at remote area or small village - Collection takes total 1.5 days up to longest 2 days PBOC Settlement System Member hub (A) Same day transfer (T+0) (B) Take 0.5 to 1 day Member hub

8 Big 4State-owned Banks Minsheng SPDB Hua Xia CN Everbright Fujian Industrial SZDB CMB GDB CITIC BOCOM PBOC CNAPS Member Hub Statistics

9 Summary of Traditional Channel - Routing Through Banks Internal Clearing Systems The Collection Cycle Historically, the key reason for delays in remittance process due to need to settle between at least 2 banks internal clearing systems Large local banks nationwide internal branch clearing networks effectively operate as separate national clearing networks Currently, can consult with your Banking Partner on how to leverage on the local banks extensive network to your advantage

10 Tips for Best Practice in Routing Customer Payments –Undertake a PAYER BANK ANALYSIS with your Bank partner –Your Bank partner will help select a the payment route that will result in the quickest settlement time –Your Bank partner will also assist in communicating any change in payment routing to your customer base –This systematic approach to reviewing payer behavior will ensure that your EFT collections are routed in the most efficient manner possible The Collection Cycle

11 Issues Faced in Processing Payments - In Brief How to facilitating payments processing via electronic banking platforms Facilitate remote authorization Secure authorization environment Centralized payables processing 3rd party bank payments initiation Trend toward establishing shared service centres for payments processing for multiple legal entities in China The Payments Cycle

12 Tips for Best Practice in Processing Payments Choose a Bank partner in China to provide robust e-banking platform that accommodates: Complex authorization matrix capabilities Remote payment authorization Chinese language capabilities Automated reconciliation with internal AP system 3rd party bank payment initiation The Payments Cycle

13 Banks

14 Liquidity Management Corporate Structure Issues - Use of Holding Company as Re-Invoicing Centre China Holding Company Subsid ASubsid B Subsid C 3rd party customers Inter-co sales --> 3rd party sales -->

15 Reinvoicing Centre Contd Holding company as distribution agent (MOFTEC approval required, K over RMB30 mio.) Distribution subsidiary, often with sales function. Can centralize collections Raise cheap funding through discounting commercial drafts Can iron out cash imbalances by offering preferential terms to factories in need, but amount and tenor restricted Tax impact - VAT and income tax Liquidity Management

16 Reinvoicing Center Re-invoicing centre Factory B Factory C Factory A Customers Term payment Suppliers Term payment Commerci al draft Pref. deposit Credit line drawdown Discountin g without recourse Advance payment Banks

17 Liquidity Management Sweeping Techniques In many cases, MNC will have multiple sales branches scattered throughout China, collecting sales proceeds locally. This results in numerous issues, including: idle balances left in branch accounts; delayed transit of funds to HQ concentration account manual compilation of bank account reports; management time/effort managing multiple bank accounts with different banks; inadequate central control over branch bank accounts

18 Liquidity Management Sweeping Techniques These issues can be addressed via establishing a sweeping structure Brief mechanics of this structure as follows: All branch offices open collection accounts with one foreign bank. Where branch office is located outside permitted scope of foreign banks RMB business, foreign bank arranges for branch to open collection accounts with partner local bank. A minimum branch account threshold is set by HQ (could be zero balance), and foreign bank monitors balances on pre-set basis. Where funds in branch accounts exceed minimum amount, automatically swept to the HQ concentration account. Comprehensive reporting on collections is provided for improved management information and control.

19 Liquidity Management Pooling of Funds - Bilateral Entrustment Loans Entrustment loans effectively allow inter-company financing activities by routing the transactions through a financial institution (as entrustment loan agent). Bilateral entrustment loans are a simple and effective tool to use when group has: one entity with consistent levels of surplus cash, and other entity(ies) that are borrowing from banks. one entity with stable level of bank borrowings, and other entity(ies) with consistent levels of surplus cash Bilateral means individual entrustment loans signed between the Corporate Lender and the Corporate Borrower for each entrustment loan transaction.

20 Cost/Benefit of a Bilateral Entrustment Loan Costs Stamp duty % of principle amount Business tax on interest earned by cash surplus entities - 5% Trust loan fees Benefits Immediate reduction in loan interest paid to banks for working capital requirements Improvement in yield on surplus cash for lending party Liquidity Management

21 Pooling of Funds - Virtual Pooling Structure When to use vs. bilateral entrustment loan? When group has BOTH multiple cash surplus and cash deficit entities spread around the country Benefits groups of companies with net working capital requirements Reduces borrowing costs at individual and overall group level Pockets of excess cash better remunerated at individual and group level Liquidity Management

22 Virtual Pooling - Implementation Participating entities and bank enter into master entrustment loan agreement Transfer funds from cash rich to cash poor entities through a designated Pool Header At any one time only the exact amount required can be borrowed by the operating entities from the Pool Header Pool Header enjoys beneficial conditions on credit line and more flexibility to invest excess cash Backstop line of credit provided to pool participants to ensure liquidity available at all times Liquidity Management

23 Operating a Virtual Pool Credit line drawdown (can be made interavailable to all participating entities) Co 1Co 2Co 3Co 4Co 5 Cash > Threshold Cash < Threshold Cash > Threshold Trust loan drawdown Trust loan + interest repayment Trust loan drawdown Trust loan + interest repayment Cash < Threshold Company 6 (pool header) Pool manager Banks

24 Cost/Benefit of a Virtual Pool Costs Stamp duty - at least 0.015% of principle amount (assuming 3 parties to the entrustment loan agreement) Business tax on interest earned by cash surplus entities - 5% Trust loan fees Arrangement fees Individual drawdowns and repayments are exempted from stamp duty Benefits Reduction in loan interest paid to banks for working capital requirements Liquidity Management

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