China is changing so fast it is difficult to keep up with many of the changes, which is why corporate treasuries try and employ staff with local knowledge and contacts. Some of the latest opportunities and problems are described below.

Providing distributor finance
Thermo Fisher - a leading supplier of analytical instruments, robots, laboratory consumables to hospitals, labs and research institutions throughout China - has 300+ third-party distributors to handle its sales and delivery. The problem is the length of time it takes hospitals in China to pay their bills, typically 3-6 months, and is way beyond TF’s normal DSO of <40 days. Obtaining loans from China’s local banks for distributor-focused companies, whose offerings are better suited for manufactures, is difficult. Also these banks would typically require an explicit guarantee from the client that any failure to pay by the distributor would be covered by the supplier. 

So TF set up a deal with Jimubox, a China-based online financial service company. In December 2013, starting with a microloans programme geared to helping improve the working capital of its distributors. So far Jimubox has made approximately Rmb7 million worth of loans. Jimubox does not require loan guarantees from the MNC or any other type of legal participation in the loan programme. They do require the MNC to verify some of the credit data that the supply chain borrower provides to Jimubox.

How it works

Jimubox undertakes a series of credit checks before it provides a loan. It establishes how long the distributor has worked with the MNC, annual purchases, and its financial performance and growth. Typically, the distributors Jimubox lends to have had relationship with TF for more than three years. After assessment and due diligence has taken place, a one-year credit line is set up.

The pre-application usually takes up to two weeks because dealers usually take one to two weeks to supply Jimubox with the documents and information. After the distributor has signed off a purchase deal with the buyer, the loans can be transacted within 48 hours. It takes Jimubox one business day to finalise the credit file and complete the final risk management procedures, and one more business day to fund the loan.

Self-preservation

To ensure that the loans are used to buy Thermo’s equipment rather than competitors’ products, Jimubox will ask the distributor to provide two contracts: the purchase agreement between itself and TF, and the purchase agreement between it and the customer. After Jimubox validates the contracts, the distributor can then request a loan equal to or less than the value of the purchase order. The loan period is usually three to six months, in line with the payment schedule of the end customer. If the distributor wants to return the money to Jimubox earlier than agreed, the distributor can pay the loan in advance without any fees or a higher interest rate. However, extending the loan is not allowed. The distributor must repay the loan at the original maturity in all instances.

Fast RMB cross-border inter-company loans
Previously Hyva, the Amsterdam-based hydraulic-cylinder maker, used to remit cash to the Netherlands by paying cross-border annual dividend payments which are subject to 10% withholding tax. This year they replaced the annual dividend payments with an inter-company loan and benefitted from deferring the withholding tax.

An indication of how normal this form of inter-company loans is becoming is, that after engaging Deutsche Bank, it only took Hyva two-and-a-half week for the application process with China’s regulators, opening the renminbi bank account specifically for the inter-company loan programme, and executing the transaction. Deutsche Bank have bundled Hyva’s inter-company loan programme with a renminbi swap, ensuring that the company has sufficient funds to repay the loan.

Hyva is limited to $15 million in inter-company loans at a fixed-interest, market-determined rate. Loans within the $15 million quota must be made and repaid before fixing a new quota based on 2014 financial results. The new system saves the company the regulatory admin involved in dividend payments, whilst offering the treasury team more flexibility in funding its China subsidiary.

More free trade zones needed
At the Association of Corporate Treasurers (ACT) Asia Conference in Hong Kong earlier this month, Knorr-Bremse treasurer Ernest Mui called for China to establish more Shanghaistyle free trade zones in order to balance China’s corporate treasury needs. He argued that favourable rules are distorting treasury and investments in financial services in the country as banks and corporates move to the Shanghai free trade zone (FTZ) zone to take advantage of them. 

Other Asia-Pacific treasurers with operations in China are also calling for the rules of the new FTZ to be expanded to other cities in China as soon as possible.