Free the Money: Do You Know Where Your Cash Is Trapped?

by Hendra Lembong , J.P. Morgan , 13 August 2012

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topics:
Cash and Liquidity Management Treasury Management

tags:
business model optimization liquidity management trapped cash

For any corporation looking to optimize its business model for Asian expansion, making the best possible use of available internal liquidity is a key consideration.

Different liquidity management strategies can be used to support self-funding of new operations within a country or to minimize capital deployment for working capital needs. Apart from minimizing unnecessary borrowing and maximizing investment return, corporates can utilize just-in-time funding structures and invoice leading and lagging.

However, unlike regions such as Western Europe and North America, in Asia this task is complicated by the hurdle of trapped cash and the diversity of currency and exchange controls.

Trapped in Asia

One of the most common reasons for trapped cash is local regulation that restricts the movement of local balances offshore. Even where such restrictions are being gradually relaxed (such as in China and Malaysia), the pace of relaxation is still not fast enough to prevent excess pools of currency being continuously accumulated onshore.

It may be possible to extract some value from these balances through interest compensation structures, but they are effectively excluded from any regional or global liquidity structures the corporation may operate.

While local regulation is often cited as the primary cause of trapped cash in Asia, other factors can also be responsible. If the corporation’s existing banking partner is unable to deliver sufficiently timely and comprehensive cash reporting information, then idle cash may be left in accounts due to lack of visibility.

In other cases, trapped cash can be the result of the corporation’s own tax planning measures or over-capitalization of an operation when it was first established.

Asia is also extremely diverse in terms of currency and exchange controls, which adds an additional consideration to any corporation’s business optimization model for the region. Establishing the best possible processes and structures from the outset is crucial if FX risk is to be managed and the optimal use made of available liquidity.

This raises a variety of questions:

Is there a corporation-wide FX hedging policy?
Is the cost of establishing a dedicated treasury function to manage the FX risk in Asia justifiable?
What hedging instruments are available and what regulatory constraints apply to their use?
Is there sufficient liquidity in these instruments to make their use feasible?
Can the bank provide efficient conversion and aggregation of cash in the functional/base currency?

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