There are many challenges and opportunities for companies and banks in managing cash flow in Asia. Santander and GTR gathered a group of local experts to discuss the benefits of doing so from Hong Kong.
- Alby Lee, head of global transaction banking, Asia Pacific, Banco Santander S.A., Hong Kong branch (chair)
- Maria Chung, executive director, trade and supply chain, global transaction banking, Banco Santander S.A., Hong Kong branch
- Cindy He, director of group treasury department, ZTE Corporation
- Raymond Man, deputy general manager, head of finance and RM department, Samsung Construction & Trading (C&T), Hong Kong
- KT Fung, partner, Stephenson Harwood
Lee: Thank you for joining us for this roundtable. Our first topic is ‘Continuing to finance trade amid political and macro upheaval’. First, I would like to ask how you see the macro challenges right now?
He: The monetary policy in China has affected many corporates onshore. Banks in China are under tremendous pressure in terms of moving funds in and out. Hence, the lending market in China is now very tight. ZTE sees onshore renminbi (Rmb) funding costs as being high. With regard to forex control, we have experienced the tight regulations from the State Administration of Foreign Exchange [Safe – China’s forex regulatory body]. Safe is still discouraging money outflow from China.
Lee: You talked about the tightening of the fund flow, and also the interest rate onshore in China, is this applicable for both Rmb and the US dollar?
He: For the US dollar, Libor continues to increase, but the speed of increase has slowed down. So in general, US dollar funding is still more competitive, and we continue to consider US dollar funding offshore.
Man: I come from Samsung C&T, the trading company, and we focus on the trading of commodities. Last year we saw a tightening in supply chain finance, which is really serious, especially at year end. We feel it especially when we have to do repatriation of the funding from China, such as dividend payments or capital outflows, or even selling an asset from China to Hong Kong; it takes a long time for us to get approval from Safe.
When we go to the banks, they say there is window guidance, and they cannot tell us exactly what is happening. What we have to do is really go on a case-by-case basis and go through each transaction in great detail, and the outcome could be very different.
What we have heard from the market on the bank side is that for repatriation of funding, they will require you to separate a US$2mn transaction, for example, into a 12-month partial payment from China to Hong Kong, because during that time the Rmb kept depreciating so the government had to take drastic measures. But they cannot put it on paper, there is nothing written publically, so every time we need to get our banking partner to help us to find out what the scenario will be.
Luckily, we have been successful in moving the money normally, even though it takes some time and needs more documentation; we have found that we have to submit perfect documentation, and the document keeps being returned, but by the fourth time we finally get the approval from Safe. Nonetheless, this is the regulation and we have to follow it. This is for the capital side.
As for the trade side, the company is still able to repatriate funds to and from China. I have heard people saying that the government is trying to control fake trades and certain kinds of arbitration. As long as you have real trade, for example we have a bill of lading, we have a customs clearance document, then things are still going well. But, ultimately, the tightening in forex control is already impacting us.
From our side, we normally do the offshore funding in Hong Kong. We do it in US dollars mainly, and in China we do it in Rmb, so we don’t see a big problem there, but we are always looking to the market and we keep talking to the banks to see what is going on and what will be changing.
Lee: We see something similar from other clients. We understand that when doing onshore forex hedging, the banks need to have an additional 20% in capital reserve; and thus increase the coporate’s hedging cost. I think one of the main reasons is that the Chinese government discourages selling Rmb, even forward, in China. That is also related to the Rmb depreciation, because any foreign currency outflow may have some impact on currency stability.
From the Chinese corporate perspective, is window guidance something that you have encountered in recent months?
He: In terms of window guidance, ZTE has been able to raise foreign currency under a normal trade background, but we do feel the tightening of forex regulation controls. As a tier-one export client listed in Shenzhen, we are also under the radar of the local Safe authority, given our big export and import activities.
Fung: Some banks did encounter problems in recovering their money under bank guarantees or standby LCs issued from banks in China, despite the fact that they presented a compliant presentation. There have been rumours saying that there is a ‘one dollar in, one dollar out’ policy. Our general understanding is that the money remitted to the banks in China would be on a lump-sum basis.
That brings us to a situation where the big banks have no problem, because they have huge money going in and out every day. But for small banks, third or fourth-tier banks, they may have a problem as they may not have an equivalent capital inflow.
The second problem is, as Raymond Man mentioned, no written notification of the regulatory change has been issued. Everything was verbal. So, the banks in China may have difficulties in explaining to the foreign banks why they can’t honour the complying drawing. Where is the evidence? There is no evidence – we were just told. What is more embarrassing is that they can’t even put it in writing to tell the foreign banks, because if you put it in writing saying ‘the state told me that’, it would be even more awkward. That is the difficult part.
Lee: We do hear customers telling us that they haven’t seen a payment default, but more like delays in the whole process. Initially they should be paid on, say, day 30. Now, because of the window guidance, they may have to extend it for another 30, 60, or 180 days. But they still pay, and they are still allowed to pay at the end.
Man: In our case, when we trade, normally we receive a long-term Rmb LC from a Chinese buyer. In the past, it was for 360 days, but now it’s for 180 days. In the past, it would take two weeks to issue an LC, but nowadays the banks may take three or four weeks. If we have a delay from a buyer, we are inevitably holding stock for a period, and that could lengthen our turnover period as well.
I would say that over the last few months, the situation is getting better. The banks have a long list of requirements when you run through several discount programmes, for them to open an LC. They are starting to know which ones are required. For some sales contracts, for example, if you have proof that the trade is genuine, they can prepare it much earlier than they could a few months ago.
Lee: The forex funding controls and window guidance are more or less related to the Rmb movement, which has shown that the currency doesn’t only move in one way. How does this affect your procurement model?
He: The ZTE group has a central procurement platform in Mainland China. Further down the line, we will need to consider whether we separate the onshore and offshore suppliers, which account for 40% and 60% of our suppliers respectively. In the future, we may see more offshore suppliers using our Hong Kong platform for trading due to currency issues.
Man: On our side, it depends on the product, because if you are talking about copper, or chemicals, we purchase 100% of that from outside of China. For example, we buy copper from Chile or copper concentrate from Mongolia; whereas for other products such as silver ingot, we purchase that from a Chinese smelter.
So, for normal copper trading, we work on a short-tenor basis, but when we do silver, because it is a precious metal, we need to do some kind of prepayment, because it is a seller’s market. On the sourcing side, we also want to talk to suppliers to change from an LC to a Usance Payable at Sight LC (UPAS LC) so that it can also improve our ratio and our cycles.
Lee: From both Raymond Man and Cindy He we heard that you are trying to use Hong Kong more as a platform going forward. What is the thinking behind this?
He: Hong Kong is more efficient and more resourceful, compared to Mainland China, when you consider areas such as the talent pool, the tax and legal systems, and risk management. The Hong Kong government is also promoting Hong Kong as a treasury hub, and all of these help make it more appealing.
ZTE constantly reviews how to make use of the Hong Kong platform, and it’s an important platform from the group’s perspective. Our Hong Kong platform does the functions of trade, funding, investment and forex, and it already has established credit limits with banks in Hong Kong. Having this platform makes our business more flexible, with less regulatory control compared to what we have in Mainland China, and it keeps the funding costs very competitive and more stable.
Lee: It is mainly for funding stability. The funding is a lot more efficient to withdraw in Hong Kong, and also cheaper in terms of the interest rate.
Man: For cross-border cash pooling and connectivity between Hong Kong and China, or the bond market, recently there was a Bond Connect programme launched by the Hong Kong Exchange, which links Hong Kong’s debt capital markets with those in Mainland China. So Hong Kong in the future will be a very efficient place for a foreign company to set up their treasuries.
Lee: How do you see that, KT?
Fung: Hong Kong has many advantages, but we are facing very keen competition from Singapore. Firstly, from a legal perspective, some foreign companies are worrying about the rule of law in Hong Kong. And the Singapore government has much stronger support in turning Singapore into an international arbitration centre. Hong Kong says they are doing the same thing, but because they don’t have the government support. It is slow on a relative basis.
At the end of the day, it is a confidence issue. But it is not that serious at this moment, but in the long run, it is something we need to take into account. Hong Kong is still a very efficient place in many aspects, and the major benefit for Hong Kong is that we have very close business connections with China. Hong Kong business parties are much more experienced in structuring deals with Chinese parties. China, to be honest, is the most innovative area in developing new products, new concepts, so from this angle, I think Hong Kong is still ahead of many other countries.
Lee: We have spoken about the benefit of using Hong Kong as a trading platform or re-invoicing centre. How do you make use of Hong Kong to help you manage the supply chain?
He: The payment cycle for local suppliers is usually quite long – up to six months. Our group financing arm will provide financing to those local suppliers with tight cash flows and also enhance the relationship with their suppliers. For offshore suppliers, the local banks can assist us to make US dollar payments outside of China either through their US dollar bank account or forex conversion from Rmb to US dollar.
ZTE can take out US dollar loans at competitive rates, which we can then use to make import payments through our agent banks. Looking to the future, we are involved in discussions with some international banks to arrange a supply chain programme via our Hong Kong platform, in order to ease our suppliers’ liquidity concerns, as well as reduce their borrowing costs.
Lee: We also hear that onshore China, when you try to extend payment terms, there are certain regulations saying that the payment terms cannot exceed 90 days. So if you want to exceed it further, there will be constraints. Do you see any benefits in using Hong Kong to help you to manage your supply chain?
Man: Yes, definitely. We want to extend suppliers’ payment terms, but for commodity trading sometimes it is difficult. For example, when we are dealing with silver, we are still required to make prepayments. And sometimes, when we buy copper from the world’s largest smelter, they have already standardised their payment terms, which is by standing instruction (SI) payment. It’s difficult for us to bargain on that.
We had changed some orders to UPAS LCs with certain suppliers, but the benefit in terms of our group exposure is not that big. So still, we want to talk to our bankers to try to get more suppliers to join this programme.
Lee: The other thing that we observe in the market is, in terms of the document or logistics flow, it is a lot more efficient to use a Hong Kong platform. For example in China, if you want to make a US dollar payment outward, you need to have the customs declarations and so on. In Hong Kong, the document flow is easier.
Also, when there is any window guidance in China, of course, banks will try to avoid any delay, but in fact, there will be delays. That is why there were arguments about who will pay the interest. Making use of the Hong Kong platform, however, you can still fulfil your payment obligation on time, because there are no forex controls here.
Man: We do the same in China. We have done some re-export business in the past with electronic parts. We buy from Chinese suppliers, and the cargo goes from a Hong Kong warehouse, and is shipped to Korea. It is still allowed, but since last year, China has tried to put more restrictions on this kind of business. Payment and cargo flow needed to be perfectly matched with the documents.
Lee: How can using Hong Kong as a platform help you do more prepayments?
Man: Hong Kong is a financial centre, so you can get funding at a very competitive level, and the structure can also be creative sometimes. We can use a funded participation agreement, or a red clause LC [a specific type of letter of credit that facilitates pre-shipment finance for the beneficiary], for example, to achieve our target.
Lee: How do you choose which customer you will do prepayment for and which one you don’t?
Man: First we do a spot trade based on the SI payment, to ensure the supplier really did deliver the quality cargoes on time. We do the due diligence by ourselves and, at the same time, we require them to make a standby LC from their Chinese local bank to add on as a comfort to our company, so that we can then do the prepayment.
We are a very conservative company, because the risk is actually moving on in China, every day it is evolving. In the first quarter of this year, things are looking up. Chinese trade data are looking good, but still we have some concerns when we talk to the big suppliers or the factories in China, due to liquidity issues and the general economic situation. So we need to be cautious.
Lee: Are you seeing Hong Kong being used as a hub for structured solutions?
He: The payment cycles for offshore suppliers are much shorter, with a maximum tenor of up to 90 days. This is because most of the suppliers are reputable names. We are interested in using our Hong Kong platform to explore some structuring solutions which can help us to extend the payment terms and improve our cash cycle.
Lee: For supply chain programmes, actually, the bank is very deep-rooted into this. Santander has a long history in the supply chain space.
Chung: We have over 27 years’ experience on the supply chain, particularly on the trade payable side. Globally, we process 60,000 invoices per day, and our programme size is more than €60bn, in 40 countries. We keep investing in the system, and the process, that is why we are also looking at a pre-acceptance development on top of the post-acceptance that we are talking about today.
Lee: What do you see as the difference between a truly payable programme versus a reverse factoring programme, in terms of the documentation?
Fung: Maybe I’ll briefly outline what supply chain means in the bankers’ mind. Basically, we have pre-shipment finance starting from order placement until delivery of the goods. Once the shipment is made, the financing would be classified as post-shipment finance.
Within post-shipment, there are two types of financing. One is, like factoring, you ship the goods, you sell the receivable, and then the bank purchases it. The other one is the post-acceptance, once the shipper delivers the invoice, the buyer accepts the invoice and undertakes to pay the invoice on the due date. The risk level of post-acceptance is even lower.
So, post-acceptance from the banker’s perspective will be the safest way. It is also the most flexible and innovative way in many respects. Firstly, it creates a win-win solution for all parties, as the supplier will get their money much quicker, before the due date.
Secondly, the payment will be without recourse, because it is considered an early payment. So, unlike factoring, the purchasing bank still has recourse against the seller if anything goes wrong, other than the payment risk. And thirdly, they have the benefit of low funding costs, because the financing bank, which pays the supplier, relies on the credit standing of the buyer instead of that of the seller. That means the buyer doesn’t have to pay anything, but they can help the seller to enjoy lower financing cost. I think that would be of interest to the seller and why it is attractive to them.
Lee: In the market for reverse factoring supplier-centric programmes, the documentation will be heavily based on suppliers. However, for a buyer dealing with multiple suppliers, it is very challenging to have a successful programme.
A truly payable programme deals with one buyer instead of multiple suppliers, so the success rate will be much higher. The administration and documentation work will be primarily on the buyer. This makes the programme more scalable and therefore the chance of success is higher.
Chung: We have to rely on technology, plus the necessary logistics. We are working on the solutions. Of course, there is still some way to go, but this is where we see the trend along with post-acceptance. We have to cater for the need of the supplier and help them to deliver the goods to you on time, while at the same time optimising the cost. This is what we’re geared towards.
Fung: Can I add one point on the legal perspective that you might be interested in? Unlike Singapore, Hong Kong has a reciprocal recognition of judgement and enforcement with China.
The parties may enjoy such an arrangement so long as the contract satisfies three requirements: it is a monetary claim; the contract is subject to Hong Kong law; and it is subject to the exclusive jurisdiction of Hong Kong courts. Bank documents generally adopt a non-exclusive jurisdiction clause. So, if a contract satisfies the three requirements, the case can be tried in Hong Kong courts, and the judgement can be directly enforced in China with re-litigation. This is something very unique that no other country has. Only Hong Kong has this particular arrangement. Accordingly, if a foreign party intends to enforce a contract in China, this is a noteworthy issue.
Let us also talk about advance payment guarantee. When you make a prepayment, you require the smelter to send you a bank guarantee to support the refund of the money in case they can’t deliver the goods. The governing law of that standby LC’s guarantee has now become a hot topic. China promulgated an independent guarantee law in December 2016. In the past, all the guarantees were not independent under the security law, they were subject to the underlying contract and people complained about that. So, China promulgated a new law, saying okay, from now on, we can issue independent guarantees and we don’t have to refer to the underlying contract. So, many Chinese banks would tend to argue that they don’t want to use Hong Kong law anymore, because now they have the independent guarantee law in place.
However, based on our previous discussions, it could be an uphill battle to enforce a guarantee or standby LC in China. That gives a lot of justification for the financier in Hong Kong to insist that the advance payment standby LCs or bank guarantees must be subject to Hong Kong law and exclusive jurisdiction of Hong Kong courts. This is particularly important for those issuing banks that do not have a presence in Hong Kong, as the banks in Hong Kong are required to enforce the instrument in China. So, now, we usually advise our banking clients to insist that the standby LC or bank guarantee must be subject to Hong Kong law and preferably exclusive jurisdiction of Hong Kong court.
Of course, the Chinese bank may object, but they are now suffering exactly the same problem. They can’t get the money out, even though they have a 100% cash margin in China. When most banks draft a standby LC, they will just use UCP 600 or ISP98. For one of my clients, we inserted the phrase, ‘subject to Hong Kong law’, and that gave us a lot of advantage in the negotiating process. That explains why we collected US$1.6bn within two weeks. That is one of the major weapons we use and leverage on: we can sue the issuing bank in Hong Kong. So that is something that you might take into account.
Man: May I ask about the major difference for the banks in issuing a standby LC under UCP 600 and ISP 98? In our case, most of the Chinese banks prefer to issue under ISP 98.
Fung: In substance, they are more or less the same, except for the assignment. Under ISP 98, the assignment must be subject to the consent of the issuing bank, but under UCP, no. And it is unlikely that you will get the consent from the issuing bank in most cases. Therefore, it would be advisable to use UCP rather than ISP 98 from the Hong Kong financial entities’ perspective if assignment of proceeds is involved.
Lee: That’s absolutely an advantage for using Hong Kong as a platform, especially as many overseas suppliers are happy to be subject to Hong Kong law, which they see as effective as subject to UK law, for example. And at the same time, we have the advantage of enforcement across China using Hong Kong law.