Asian corporates have grown on the back of their trade links. This is a well-known narrative, but will it continue? Or should the region’s enterprises look at new ways to stimulate future growth?
Centralization, BPO in replacement of letter of credit, supply chain financing, settlement in renminbi – treasury innovations in Asia are coming in thick and fast
Certainly, they are keen to develop further and deeper trading relationships. Yet I would argue that the next wave of business growth will likely come in part from adopting more sophisticated approaches to treasury management.
In fact, this new phase is already upon us. New digital tools and advanced financing techniques – in part from opportunities generated by regulatory change – are helping treasuries at Asian companies generate new opportunities.
The implementation of the European Commission’s Single Euro Payments Area (SEPA) directive is one source of innovation. The regulations – requiring compliance from all firms wishing to trade with EU counterparties – have made great strides toward harmonizing payments processes in Europe.
While complying with these new regulations may be time-consuming (as it has been for European corporates), it also promises a number of advantages for Asian corporates.
For instance, greater harmony throughout the EU reduces the burden on Asian corporates as they enter new European markets – an advantage compounded by the efficiency of SEPA processes. SEPA uses XML (extensive markup language) files – a digital format that makes transactions faster, cheaper and easier to process.
As the digital revolution gathers momentum, new and pioneering technology is flowing into Asia – with the potential to revolutionize treasury management among the region’s corporates.
Centralization, BPOs in replacement of letters of credit, supply chain financing, settlement in renminbi – treasury innovations in Asia are coming in thick and fast.
Centralization: More efficient way to manage accounts
One benefit of digital technology that is attracting attention from Asian corporates is the prospect of drawing their disparate bank accounts together under a central account.
This is exactly the idea behind virtual accounts. Virtual accounts enable corporates to concentrate their funds in a single parent account that is divided into as many sub-accounts as necessary to accommodate different departments and subsidiaries.
Structuring accounts in this way offers firms greater liquidity and scalability – eliminating the need for cash pooling and reducing the time and cost required to create new accounts.
What is more, by minimizing the number of real accounts held, virtual accounts significantly improve transparency – allowing firms to track their risk exposures more easily. These advantages can give Asian corporates an edge when developing their operations abroad.
BPOs: Moving on from letters of credit
Digital technology can also be used to manage settlement risk.
Many Asian corporates still use letters of credit (LCs) to settle contracts with foreign counterparties. The fact that all but 35% of the world’s LCs are issued in Asia should give some idea of their prevalence in the region.
LCs have long been the obvious choice for firms dealing with unfamiliar counterparties, enabling corporates to offload settlement risk through bank mediation, and – through discounting – to convert their sales to liquidity without waiting for the buyer to pay.
However, these advantages of LCs are counterbalanced by lack of speed. With Asian firms keen to advance trading relationships, executing quickly is an increasingly important concern.
In other regions, open account settlement has become a highly popular method of settling contracts with international partners. However, since open account does not use banks as intermediaries, it forgoes the risk management and liquidity benefits of LCs.
Last year saw the first-ever BPO take place in Asia – between Japanese corporate Mitsui & Co and its German supplier, RVT Rühr- und Verfahrenstechnik
Since many corporates in Asia have yet to progress to open account settlement, they are now considering a new alternative: the Bank Payment Obligation (BPO). BPOs retain the form and advantages of LCs, but with the difference that transactions are conducted digitally.
Consequently, they offer an automated payments service that combines the speed and efficiency of open account settlement with the liquidity and risk management benefits of LCs.
Indeed, BPOs are starting to gain traction in Asia. Last year saw the first-ever BPO take place in Asia – between Japanese corporate Mitsui & Co and its German supplier, RVT Rühr- und Verfahrenstechnik.
Given the potential of BPOs to simplify and accelerate trade transactions (and the strong links binding Europe and Asia), their use for settlements between the two regions will likely increase dramatically over the coming years.
Reinforcing the supply chain
The digital advances are contributing as well to greater flows between Asian firms and foreign counterparties – a trend that is generating further innovation.
One area benefitting from this is supply chain finance. For instance, a growing number of highly-rated firms are using their strong profiles to support smaller suppliers. By guaranteeing specific bank payments on their supplier’s behalf, these firms are able to help them secure credit at a lower rate.
This is proving highly beneficial for Asian corporates, many of whom act as suppliers for highly-rated European firms. And, of course, this is a two-way street. Larger Asian firms can also take advantage of this technique to stabilize their own supply chains.
Rise of Asian influence
This metaphor of a two-way street applies equally to innovation flows between Europe and Asia. While Asia’s influx of SEPA-inspired technology bears the mark of European influence, Asian practices are also gaining ground in Europe.
This is most clear in the case of the renminbi. The Chinese currency has now established itself as a major international currency. The increased use by corporates in Europe and elsewhere, which are looking to reduce the risk and cost of dealing with Chinese counterparties, is turning the RMB into one of the five most popular settlement currencies in the world.
While this growth has been impressive, however, the RMB is still used to settle less than 2% of all trades involving China – indicating huge potential for further growth. I
The continued high demand for the RMB, combined with relaxed restrictions on its use and the introduction of new free trade zones in China, make it highly likely that the RMB will increase its share of international trade settlements – with the move to full convertibility a near-certain prospect.
And as corporates in Asia adapt to these developments – adding new technology and advanced techniques into their arsenal – they should continue to grow stronger, more sophisticated and more influential.
About the Author
Kok-Keong Tay is head of GTB Asia at UniCredit, a European commercial bank with operations in ASEAN, Australia, China, Hong Kong, India and Japan.
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