Hedging FX

Commentary

After our call, it seemed as if this summary would be unusually brief. South Korea and Taiwan are both prosperous, business friendly, economies with strong currencies. There are no official exchange controls, and most, if not all, international banks are well established, and can provide most services. So – what complications can there be?

On one level, the answer is everything is fine. Foreign owned businesses can, and do, operate successfully in both markets. Imports can be paid for, and profits repatriated, albeit with a withholding tax penalty. Intercompany loans are permitted, with some bureaucracy.

But it turns out both markets present challenges. These typically result in solutions which are less than optimal. However, things work, and, as these markets, while important, are significantly smaller than the regional giants of the PRC and Japan, peers often decide to leave well alone. There is a list of items peers would like to address – but none is top priority. 

This situation is due, in part, to the history of both markets. Both are on the periphery of China and have, over the centuries, been under varying degrees of Chinese control. Today, Korea is well established as a separate state: as we all know, this is still very much an issue between China and Taiwan. Both markets were Japanese colonies between 1895 and 1945: unlike Korea, Taiwan has a largely positive memory of this experience. In both cases, the Japanese laid the foundations of today’s economies. Finally, both emerged in 1945 in poverty: the subsequent industrialisation and economic development relied, in part, on protective measures and exchange controls. While these restrictions have greatly eased, many of the frustrations encountered by our peers are the legacy of this system.

So, what does the landscape look like?

Please Login / Register to read the rest of this Commentary.

Basic membership of CXC is free to Corporate Treasury professionals: Why Sign Up with CXC?

Commentary

We visit Argentina regularly – at least, in our calls. This is not because we like it – though it is well worth a physical visit. The regular calls are to keep track on the latest, unconventional, attempt to turn the economy round. Will it be successful? At the same time, our peers’ comments showcase perfectly how treasurers and their companies have to react to difficult, and changing, circumstances, and the complex choices they face.

There is no reason for Argentina not to be wealthy – in fact, at the end of the 19th century, it was one of the richest countries in the world. It has abundant natural resources, huge agricultural and fishing potential, and a well educated workforce. Yet, since the 1930s. it has teetered from one economic and political crisis to the next. Every time it seems progress is being made, the economy slides back.

Javier Milei’s latest austerity measures, with the help of significant currency support from his political ally in the US, Donald Trump, appear to be working so far. Peers report that access to foreign currency, while still subject to limitations, is improving, and some of the arrears are being paid down. The famous chainsaw approach to reducing the stifling red tape and bureaucracy has been less drastic than promised, but peers reported some progress. There has been a social cost, and reports indicate that the population is enduring the austerity, but is not prepared to do so indefinitely. 

The options for settling foreign currency:

• For goods imported since December 2024, the process is straightforward. Currency is made available once the goods have cleared customs, though there is still a lot of paperwork.
• For services imported from third parties, the foreign liability has to first be included in a quarterly report to the central bank –  via Communication A 6401 an external assets and liabilities survey. If this is approved, payment can be made in the following quarter, giving effective payment terms of 90 days. If there is any problem or query, payment will be delayed for another month, giving terms of at least 120 days.
• Intercompany services, royalties and dividends have to go through this same process, but approval will usually be delayed, often for long periods.

For intercompany invoices dated before December 2024:

• Buy BOPREALs. These are bonds issued by the Argentine government in pesos, but which will be settled in dollars at a predetermined maturity date. There have.....Please Register / Log In to read the rest of this commentary

   

  CXC reports are based on confidential peer discussions between senior corporate treasurers sharing their solutions to complex treasury challenges.
  Our commentaries, comprising the key findings from the reports are FREE to corporate treasury professionals - simply register here to apply for Basic Membership giving you access to 185+ commentaries and receive new commentaries direct to your inbox.
  Our reports, available via subscription or individual purchase, are packed with practical, experience based learning allowing users to benchmark their operations and identify proven, actionable efficiencies - Read our Testimonials Here

Commentary

Cash pooling and sweeping is one of the most basic and widespread tools in modern cash management. To the extent allowed under exchange controls and regulations, it is important to bring all the liquidity into a central entity, and avoid having cash balances earning little to no interest, while some entities are borrowing and paying spreads. 

By definition, this central entity performs the functions of a bank: it is taking deposits and making loans - for tax reasons, it needs to pay and charge interest on the balances. This also means it faces a lot of the challenges banks have: it needs good systems to track the loan balances and calculate and post the interest, and it also needs to ensure any FX exposures are properly identified and managed. Of course, it also needs to have access to sufficient group funding to meet the group’s net cash needs.

Unsurprisingly, once they have set up the relevant structures, many treasurers find they can be used to provide additional functions: POBO (Payment On Behalf Of) is quite common; ROBO (Receive On Behalf Of) exists but is less frequent. Some, but not all, have used their in-house banks to eliminate intercompany netting: any transaction between group companies gives rise to a debit or a credit to their accounts with the IHB, which will be cash settled or not in accordance with regulations and cash management policies. The central entity can also be used for FX management, executing trades with the market and doing back-to-back intercompany hedges. 

In this call, peers went through the systems they use, and gave a frank assessment of the benefits and drawbacks of IHBs – it is not all plain sailing. 

To read the rest of this commentary - please Log In or Register for basic membership (free)

Log in / Register to read the latest CompleXCountries (CXC) commentary on Corporate Treasury & Banking in China has now been published. It adds to a growing archive of corporate treasury knowledge relating to China - Browse 18 commentaries with associated reports here - all sourced from detailed confidential peer discussions between the treasurers of multinational companies with operations in China - the report  includes approaches and experiences with:

• Regulatory environment and regulatory uncertainty
• Engagement with regulators and regional variation
• Cross-border cash pooling frameworks (SAFE and PBOC)
• Cash repatriation methods (dividends, pooling, intercompany loans)
• Trapped cash and liquidity management
• Use and limitations of cross-border and back-to-back loans
• Decisions not to implement pooling and alternative structures (notional pooling)
• Relationships with local Chinese banks versus international banks
• Service quality and challenges with Chinese banks
• Role and performance of international banks
• Domestic cash pooling and cash reporting
• FX management, interest rates, and bank competition
• Onshore (CNY) versus offshore (CNH) renminbi markets
• Short-term investments 
• Funding structures (equity, intercompany loans, onshore bank loans)
• Supplier financing programmes and associated regulatory/KYC issues

International banks discussed in the report include: HSBC, Standard Chartered, JP Morgan, Deutsche Bank, Mizuho, Commerzbank and Citi

Chinese Banks include ICBC &  Bank of China