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Treasury innovation fuelling Asian growth
Asian corporates have experienced a significant amount of growth in recent years – much of it due to expanding trade with new counterparties. As they seek to continue that growth by developing their relationships within Asia and overseas – particularly in Europe – they will have to adopt more sophisticated tools for managing their treasury operations.
Kok Keong Tay 14 Jul 2015
 
   
Asian corporates have experienced a significant amount of growth in recent years – much of it due to expanding trade with new counterparties.
 
As they seek to continue that growth by developing their relationships within Asia and overseas, particularly in Europe, they will have to adopt more sophisticated tools for managing their treasury operations.
 
Advances in Asia, heralded by the widespread adoption of the renminbi as a global settlement currency,  are helping to meet these needs, while innovation flowing into the continent from European trade partners will bring new tools and techniques that can help Asian corporates accelerate their growth and influence.
 
In fact, the innovation is being driven in part by exposure to new regulation namely, the European Commission’s Single Euro Payments Area (SEPA) directive. While compliance required by all those trading with EU firms will demand time and resources, SEPA nevertheless offers two significant benefits to Asian corporates.
 
The first is greater efficiency, courtesy of the digital XML format (the extensible markup language for encoding payments instructions between banks). As European corporates are discovering, XML enables corporates to process payments faster, more efficiently, and at a lower cost – something Asian corporates wishing to trade with Europe will also discover as they adopt SEPA formatting structures.
 
And the second is innovation. The shift to digital payments has paved the way for a raft of new digital tools with a potentially profound impact on the way Asian corporates run their treasury operations.
 
One of the key improvements digital technology offers is the opportunity to centralize cash-management processes. For instance, we are seeing increased demand for services such as virtual accounts, which enable firms to hold all their funds in a single “physical” account, divided into as many “virtual” accounts as required by subsidiary or departmental operations.
 
The benefits of structuring accounts in this way include greater transparency for mapping exposures to different regions, and greater speed, control and scope when it comes to creating accounts for new departments and subsidiaries – key advantages for Asian corporates looking to develop their operations overseas. Of course, the cash management benefits are also considerable.
 
Digitalizing the letter of credit
 
Digital innovations are also helping Asian corporates manage their settlement risks. For many Asian corporates, letters of credit (LCs) are currently the preferred method of settling transactions. Indeed, such is their popularity in the region that 65% of all letters of credit are issued in Asia.
 
Certainly, LCs offer excellent value for counterparties in the early stages of a trading relationship, with bank mediation mitigating the risk of counterparties defaulting and offering immediate liquidity. Yet with Asian corporates looking to develop their trading relationships, speed is becoming a greater priority and firms are now looking for a faster method than the sometimes time-hungry LC.
 
Transacting under open account terms is one option, yet that involves sacrificing the risk-management and liquidity benefits of LCs. Digital technology, however, offers corporates a further option: the Bank Payment Obligation (BPO). BPOs are effectively digitalized, bank-issued, letters of credit, offering the same risk-management and liquidity benefits, while retaining the speed and efficiency of open account settlement.
 
This means that not only can BPOs accelerate transactions between corporates and their established partners, they can also apply the same speed to transactions with unfamiliar counterparties – all while containing the risks.
 
It should therefore come as no surprise that Asian corporates are beginning to adopt the BPO with the first Asian BPO transaction taking place late last year, between a Japanese corporate and its German supplier. Following on from this deal, both the size and scope of the BPO’s use in Asian-European trade is certain to grow.
 
New financing techniques also taking hold. As flows between Europe and Asia are increased by digital innovation, further innovation is encouraged, not least due to firms beginning to collaborate across regions to introduce more-sophisticated financing techniques into their supply chains. For example, we are now seeing larger firms using their strong credit ratings to guarantee specific bank payments on behalf of their suppliers, enabling smaller firms (or those in higher-risk countries) to secure credit more easily and at a better rate.
 
With many Asian firms dealing with more-highly-rated counterparties in Europe, this technique offers tremendous value. And, given the extensive growth Asia has already undergone, there are also larger Asian firms able extend the same support to their own supply chain.
 
Asia set for future growth
 
Of course, another consequence of greater flows between Asia and foreign markets is the growth of Asian influence. Just as SEPA's innovations are finding traction in Asia, so Asian practices will begin to filter through to other economies. One powerful example is the renminbi (RMB). As China has taken up its position as a major economic power, the renminbi has, thanks to internationalization, become a major currency. Now the world’s fifth most popular settlement currency, it is seeing unprecedented use by corporates in Europe and elsewhere, not least because renminbi settlement reduces both the costs and the risks of dealing with China.
 
And despite what has already been a well-documented and prodigious rise, there remains huge potential for further growth. Indeed, only 2% of deals involving China are currently settled in renminbi, a percentage that is certain to increase significantly.
 
With new free trade zones taking shape, and China continuing to liberalize its currency regulations, the RMB’s move to full convertibility is just a matter of time. And, of course, with the expansion of Asia set to continue, its influence and sophistication will surely grow too.
 
 
Kok-Keong Tay is head of GTB Asia at UniCredit.

    

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