International companies from mid-caps through to the largest multinational corporations (MNCs) have always looked at markets in Asia as an attractive location for executing low-cost, routine processes, while keeping their corporate activities closer to their global headquarters. But 15 years ago, the technology and expense involved in setting up a regional treasury center (RTC) in Asia meant that only the largest MNCs were willing and able to bear the cost.
Now, however, with exponential growth and an enhanced economic profile, enterprises are expanding rapidly outside their home markets. And these companies are seeing Asia as a highly advantageous location for establishing or expanding their strategic RTCs.
Non-Chinese companies more active in other areas of Asia than in China may want to consider locations such as India, Malaysia, the Philippines, or, as has become popular recently, Sri Lanka
About half of the 7,500 foreign or mainland Chinese companies in Hong Kong are already operating regional headquarters that carry out treasury functions. Meanwhile, many of the 12,000 European and US companies with operations in Singapore use the city as their regional headquarters, according to Reuters.
These figures demonstrate just how relevant treasury centralization has become in Asia.
The vast improvement in technology and banking infrastructure in the past decade contribute to the growing interest in setting up Asian RTCs. But the real drivers behind this rise are the growth of inter-regional trade and the internationalization of the renminbi (RMB).
These factors have encouraged international mid-caps and MNCs to evaluate the best locations for centralizing their RTCs in Asia. Choosing the right location is critical, with many criteria coming into play.
Locating the center
Firms are now looking for a business-friendly environment, supported by reliable infrastructure, strong banking services, a large labor pool, relevant experts and a favorable regulatory framework.
Of course, cost is another factor – and certain locations in China which were once seen as affordable are no longer so. For instance, Shanghai is no longer regarded as inexpensive compared to emerging cities such as Chengdu, where a number of western multinationals, including HP and Honeywell, have moved their back offices.
Indeed, non-Chinese companies more active in other areas of Asia than in China may want to consider locations such as India, Malaysia, the Philippines, or, as has become popular recently, Sri Lanka.
Certainly, many locations outside China are keen to attract the business. Countries such as Thailand and Malaysia are increasingly rolling out incentives and relaxing regulatory restrictions to attract new companies and compete with their established counterparts.
Perhaps most successful in this respect are Singapore and Hong Kong.
The lure of Singapore
Singapore is a mature location with an established RTC incentive scheme which has attracted many international companies – particularly from Germany. Tax incentives are available to companies that use Singapore as a regional base, global headquarters, or a center for conducting research and development or higher value-added activities.
In particular, the Finance & Treasury Center (FTC) Award administered by the Singapore Economic Development Board (EDB) offers a number of incentives for companies looking to establish a treasury center in Singapore. Companies with FTC status enjoy income tax concessions and withholding tax exemption for a period of 5 to 10 years.
In addition to this, Singapore’s wide double tax treaty network, low corporate income tax rate, and sophisticated banking sector also make the island republic an ideal location for treasury operations – so long as corporates are comfortable with the higher costs relative to its Southeast Asian neighbors.
Hong Kong calling
Hong Kong is another established financial hub with close proximity to China. Its favorable business environment and well-established financial market (3rd in the Global Financial Center Index and ranked 2nd in stock market capitalization), have already made it an attractive location for companies looking to set up an RTC.
In February 2015, the region proposed tax changes that would make all inter-company interest tax deductible for corporate treasury centers and reduce the tax rate on profits arising from specific treasury activities to 8.25%. This is half the current rate, and below Singapore’s 10% rate.
Amid concerns over global economic uncertainties – with currency and commodity prices fluctuating – as well as heightening regulatory scrutiny and industry competition, cash has become a crucial asset
These changes have now been put into law via the Legislative Council, and are scheduled for implementation in the first half of this year.
Prior to the internationalization of the RMB, companies operating in China had to manage their exposure to the currency onshore. Today, RMB internationalization and, in particular, Hong Kong’s RMB trade settlement scheme, enable RTCs to hedge their foreign exchange exposure – attracting companies with a large Chinese footprint or growing activities in China.
Because of the volatility in China’s financial and currency markets, some temporary measures have been imposed and these have had the side-effect of slowing RMB internationalization and crimping FX hedging strategies in Hong Kong. But the long-term direction is clearly towards liberalization and internationalization.
Beyond this, Hong Kong’s favorable environment for interaction with mainland China is another draw – with its cultural and linguistic similarities greatly simplifying the process of doing business in China. Indeed, Hong Kong is a leading offshore center for RMB, with deposits of more than RMB 1 trillion, accounting for 70% of the global offshore pool.
Capitalizing on capital
Certainly, centralizing treasury operations in areas such as these could be a valuable move. Amid concerns over global economic uncertainties – with currency and commodity prices fluctuating – as well as heightening regulatory scrutiny and industry competition, cash has become a crucial asset.
International companies faced with such hurdles are realizing the necessity to drive shareholder value from within.
Globalization and digitalization have narrowed the gaps between time zones and geographies, allowing more convenient extraction, processing, and communication of data.
By adopting the right policies and the right technologies – and by choosing the right location – treasury activities can be centralized, meaning treasurers can effectively manage fund flows and related risks from various physical locations without having to be based at company headquarters.
This flexibility opens up opportunities for corporates to re-think their treasury strategies.
About the Author
Gihan Candappa is Head of Cash Management Sales, Singapore, at UniCredit, a European commercial bank with operations in ASEAN, Australia, China, Hong Kong, India and Japan.
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