CASH CONTROL
Cash managers in China play catch-up to foreign-invested enterprises.
By Abe De Ramos

Consider Kingdee International Software as a paradox. Based in gritty, bustling Shenzhen, just over the border from Hong Kong, Kingdee sells enterprise resource planning (ERP) software to medium-sized companies in China. The Hong Kong-listed company has big goals: swiping sales from industry giants such as Oracle of the US and SAP of Germany. "Our focus is the mainland market but we have stepped outside, and last year we saw strong sales from [foreign] companies doing business in China," says Mison Law, Kingdee's vice-president for finance.

As any savvy CFO knows, ERP systems integrate the applications from which a company's various departments run, thus promising a swift flow of information. This is crucial in the finance function, where many CFOs dream of hooking up bank account information with their ERP platforms instantly for quicker decision-making. But here lies the irony. Kingdee's cash management transactions are not even automated. Its payments to vendors, and collections from customers, are mostly written in checks, handled independently by its five sales branches and scores of distribution alliances scattered around China. Law knows this is not only inefficient, but also risky. "It may not be safe to let the funds stay in the hands of our subsidiaries," he says. To make sure the cash doesn't disappear into the wrong projects, Law aims to automate and centralize the cash management operations of the group. He wants Kingdee's payments and collections to be controlled by the head office finance team just like his bigger global competitors do. Then, Kingdee's K/3ERP system should be able to deliver payment instructions to his cash management bank at the click of a mouse, and capture all collection details, from payer names to invoice numbers. The CFO is already in discussion with two state-owned banks to accomplish the task by the end of the year. The benefits outweigh the cost, he says. "It's not just for us to strictly control the way our subsidiaries use funds, but also for us to more efficiently use these funds," Law says. A centralized cash management operation would allow him to see his latest cash position, crucial information in developing business strategies..

Blast From The Past

As Law knows better than most, China's entry into the World Trade Organization brings some new hurdles to the game of cracking the world's largest market. While he worries about streamlining his finances fast enough to meet increased competition, he knows that his customers have similar worries. This, he says, will fuel sales. "Management of local companies will realize their weaknesses and they will see the benefits of ERP in enhancing their skills," he says. To be sure, many companies in China, from private start-ups to state-owned and foreign-invested enterprises (FIEs), predict rosy figures ahead as restrictions fall away and investment grows. And like Law, their desire for more efficient cash management is growing. Desire is one thing, achieving it is quite another. The development of cash management in China is hamstrung by government regulation. Inter-company lending, as well as alternatives such as notional pooling, are illegal. As such, subsidiaries with surplus funds cannot technically support subsidiaries in deficit. In short, as far as cash management is concerned, related companies are very much unrelated.

Even so, finance managers in China are discovering that strategies to get around these problems do exist. While intermingling the funds of joint venture companies can't happen, managing their visibility - knowing the cash position of each joint venture - is. "The actual legal booking for the funds of each joint venture must be separated, but you can have a single team manage multiple entities, and gain efficiency through knowledge of the overall position," says Richard Stanley, country corporate officer at Citibank in Shanghai.

Indeed, Law's vision where day-to-day cash management is executed from a single point is getting clearer. Until recently, cash management in China was a hair-pulling event. Couriers traveled miles, hauling bags of cash to deposit counters to settle payments. Transferring funds was lengthy and unpredictable. Checks were hardly used as they have a ten-day shelf life and can only be issued to beneficiaries in the same city. Now, most of the uncertainty has gone, thanks to the introduction by the People's Bank of China (PBOC) of a national interbank clearing system, called PBOC E-Link.

Before the PBOC implemented E-Link in 2000, making a payment from one province to another, or even one bank to another, was a protracted event. "If you went to a bank in Shanghai to pay a supplier in Beijing, the Shanghai bank would make the payment via its Beijing branch rather than to the supplier's bank direct. You never knew how long it would take," says Tim Hinton, head of product management for Asia at Standard Chartered Bank. "Now customers know that if they make the payment via E-Link today, the beneficiary will get the funds tomorrow, because nearly all major banks in major locations are connected."

That may be true, but the problem is, although most banks in 700 cities in China are linked to the system, very few corporations outside of FIEs are using it. Kingdee, for example, uses it only to move funds within the company, but third-party payments and collections are done by checks. "A lot of these things are still developing," says Shannon Cheung, head of cash management at HSBC in Shanghai. "It's wholly different now from a year ago, but it will be different again a year later," he says.

Large suppliers can influence their customers to pay through E-Link, but few multinationals would admit to doing so. The real problem is cost. "The nationwide clearing system is only used by banks for bank-to-bank clearing; companies typically do not want to use this because [the charges are] far too expensive," says Leong Wai Leng, group controller at Philips Electronics China in Shanghai. Leong knows the situation well. Philips, a Dutch electronics giant, has 20 majority-owned companies in China. China typically accounts for 10 percent of Philips's global sales, which in 2000 was equivalent to US$33 billion.

Ulan Bator, With Love

For now, the main route is still the independent electronic fund transfer systems of the four major state banks: the Bank of China, Agricultural Bank of China, China Construction Bank and the Industrial and Commercial Bank of China. In these cases, payments in which the remitter and the beneficiary are with the same bank are cleared in-house. "In many cases, such transfers can be credited to the beneficiary's account within 24 hours, and for some local banks, express clearing involving larger branches can even be completed within two hours," says Cheung.

Leong likes this system - the extensive reach of the Big Four banks allows her to receive payments from as far away as Mongolia. Normally, a customer in Ulan Bator would make a check payment to his bank and instruct it to credit Philips's bank in Shanghai. This process could take up to 14 days. But because Agricultural Bank of China has a branch in Ulan Bator, the client's bank can quickly credit the check to Agricultural Bank, as the check can be cleared within the capital overnight. Agricultural Bank in Mongolia will then transfer the funds to the Shanghai branch. "The whole process shouldn't take more than 48 hours, which is a big improvement," says Leong. "In essence, you short-circuit the system a little bit," she says.

Still, the process can be onerous. That's because not all banks have branches in all locations. Suppliers and customers often find it necessary to open accounts with all Big Four banks to meet each others' obligations on time. There is a way to use just one bank, however. At least three foreign banks in China - including HSBC, Standard Chartered and Citibank - have formed alliances with all four state banks that allow FIEs to receive payments from customers with bank accounts in any of the Big Four's 26,000 branches in the country.

Philips, for example, receives the payment from Mongolia straight into its Citibank account in Shanghai. This is possible because Citibank has a Nostro account with Agricultural Bank, so the customer in Ulan Bator need only indicate that its payment is intended for Philips and Citibank. (A Nostro account is a bank account opened by a foreign bank in another country, usually in the currency of that country.) "Agricultural Bank Shanghai would credit Citibank's Nostro account, and Citi gets the money quickly," says Leong. "So instead of opening up accounts with ten banks, one Citibank account does the job," she says.

A-Hunting We Will Go

On the downside, foreign banks will only be able to offer renminbi services to local companies in late 2003, as stated in China's WTO membership. For now, foreign banks can do any foreign-currency business with local companies and FIEs in the country. Their renminbi licenses are so far restricted to FIEs located in two zones - Shanghai, which covers those located in Shanghai municipality and the surrounding provinces of Zhejiang and Jiangsu; and Shenzhen, covering Guangdong, Guangxi and Henan provinces. Two more cities will be added this year - Tianjin and Dalian - and four more each year until 2006.

Naturally, local banks, with their wider branch networks, will remain as formidable competitors. Foreign banks could find themselves in a vulnerable position because they still would depend on their existing alliances with local banks to achieve a pan-China presence, especially on the collections side. Bankers admit it's not illogical to think that these alliances could deteriorate such that foreign banks could be marginalized. "That's a possibility that we obviously have to work at," says one banker. Now, foreign banks agree that the trick to keeping these alliances intact is to leverage their international presence, which should grow in importance as more local companies pursue global strategies. But the long-term strategy is for local and foreign banks to share and develop innovative cash management products together. "One of the problems now with local banks is that the relative depth of (payment) information that they receive is very limited," says Stanley of Citibank. "Our information going back to them will have a lot more detail - amount, who paid, reference numbers, invoice numbers, and so on," he says.

One other area where foreign banks are building their strength is outsourcing capabilities. This is already dominant on the payment side of cash management of FIEs. "We try to outsource as much of the manual work as possible," says Leong. Even now, most companies in China needed to buy payment forms from the government, fill them in manually, and bring them on to banks, which then executed the payments. But larger ones such as Philips already have their payment files prepared in their ERP systems. Outsourcing happens when Leong sends these files electronically to her bank, which then uses the information to execute payments.

Real-time delivery of collections information to a client's ERP systems - essentially how much money a client has in the bank at any given time - is also possible. "Given the fact that we can provide this information on a near real-time basis, the inefficiency of having extra funds on hand that are not working for you is minimized," says Stanley. Maximizing extra funds in China is, however, a different story, as traditional liquidity management tools are still illegal (see box). Arguably, though, this would be less of an issue for local companies that wish to build automated cash management operations from scratch. Either way, cash management in China is, at last, coming of age.

Abe De Ramos is a Senior Writer at CFO Asia.