Yvonne Yiu, senior VP, Global Payments and Cash Management for Hong Kong and Kee Joo Wong, VP for Global Payment and Cash Management, HSBC, China discuss cash management problems in China.
What are the specific problems companies encounter in China relating to accounts receivables, especially when the company has several locations across the country?
The ability to receive and consolidate the collections in a centralized area (for more efficient utilization of funds), plus the quality of the accompanying collections information (for reconciliation) in a timely manner is probably the most common problem that companies encounter in China. This is especially true when the company has several locations across the country.
This issue occurs as:
- There is no real true automated national clearing infrastructure that spans across all provinces and cities in China. The China National Advanced Payment System (CNAPS) has been implemented, but its reach is currently limited to the 32 major provincial cities across China.
- There is also a mix of electronic clearing vs paper based clearing instruments used for intra-city vs inter-city payments. This more often than not, adds to additional timing and collection information inconsistencies. For example, whilst cash, cheques and cashier's orders are acceptable "in-city", the instrument cannot be used for "cross-city" payments, and therefore electronic funds transfer (EFT) is the default choice. The choice of instrument impacts upon the information that can be provided e.g. information on an electronic instrument differs from that of a paper based instrument
- The lack of comprehensive collection data to facilitate efficient reconciliation occurs in most cases as the payment reference (yes) being transmitted by banks either gets truncated through the clearing system or is not captured (as some banks refuse to capture the information for their customers). As such, it is difficult to control the quality of information to be fed from different banks.
Electronic migration has begun for a majority of cross-city payments where wire transfers via the central bank's clearing system - CNAPS or via the large local banks' in-house clearing systems are possible. However, as mentioned, the use of CNAPS is limited to its current reach - 32 provincial cities across China, and to the branches of banks that connect to CNAPS in these cities.
Most companies utilize either the account transfer (i.e. fund transfer within the same bank) or cash. Alternatively, the customer needs to open a lot of collection accounts with different banks to collect cash payment via the branch counters, which is obviously inefficient to manage.
How advanced are methods of assessing cash flow, inventory, credit risk and liquidity?
As far as I understand, customers are still primarily making use of traditional bank statements to monitor their customers' cash flow and receivables status. Only a handful of banks in the market can offer sophisticated cash management solutions - i.e. provide timely and complete collection reports - to facilitate effective management of working capital and credit risk etc.
What progress has been made so far in shortening the collection and clearing cycle?
The local market has been pushing for the deployment of CNAPS capabilities across the countries - although the coverage is not 100% yet, but this RTGS (Real Time Gross Settlement System) capability has already helped many customers in improving the fund availability.
From HSBC's perspective, we have also established alliances with the major local banks to enable payors of our customers to deposit funds (cash or account transfer) directly via the branches of the local banks, into our customer's accounts maintained with us centrally.
Under such an arrangement, funds credited to a HSBC account would go through these local banks' internal systems instead of CNAPS, and the funds availability can usually be within 24 hours if the deposit is made before the cut-off time.
-What is the existing state of the mainland infrastructure, relating to electronic collection methods and clearing houses and real-time gross settlement?
As mentioned, for paper receivables, cashier's order and company cheques are used "in-city" but prohibited for cross-city payments. Companies therefore need to resort to other means of payments e.g. bank accepted drafts or electronic payments.
For high value payment, the nationwide RTGS network is CNAPS. An alternative to this would the internal clearing systems of some of the big banks in China. More often than not, transfers can be made via these in-house systems. However, we are seeing greater traffic flowing through CNAPS.
As regards low value payment, ACH (Automated Clearing House) type batch processing is not available in China. Again major local banks' internal network (payor and payee having their accounts with the same bank) is the preferred solution.
Foreign banks are trying to offer a solution via bilateral agreements with local banks/ partners.
As regards credit cards, the penetration rate was poor before, as the applicants had to meet stringent criteria to obtain the approval of the credit line. The situation has changed and a 75% increase in number of cards was recorded in 2003, according to Euromonitor May 2003). It is expected that the channel would be a popular receivables solution in the next few years.
How does the clearing of credit cards differ from the existing system for cheques and drafts?
Can companies outsource check collection to banks?
Companies have difficulty in outsourcing cheque collection to banks' lockbox solution because of the legally required procedure of the beneficiary stamping at the back of a cheque as endorsement. As such, a cheque is not a common payment medium in China.
How feasible is consolidating the collection accounts with one or two banks in China?
It is feasible because customers are only required to open an account with a collection bank which has alliance network established with the major local players -like HSBC. Under this arrangement, the collection bank would consolidate the funds and the data from its alliance banks on behalf of its customers. Technically speaking, the fund deposited at the local bank (e.g. bank A) will be credited into the account of the collection bank (e.g. HSBC). This solution also gets around the limitations on the number of bank branches (quite limited) foreign branches are allowed to have on the mainland.
How does a company make the choice when choosing a local partner bank to work alongside HSBC? Or does the customer rely on HSBC to make that choice?
Yes, we need to work with the local banks to form a comprehensive collection network. HSBC would provide a list of alliance banks for customers to choose from. Usually customers would make decision based on a set of criteria e.g. coverage, cut-off time, funds availability date, available collection information, credit standing and charges.
