Concerns regarding inflation, currency volatility and regulatory complexities — not to mention the eurozone’s lurch from crisis to crisis — are just some of the issues facing treasurers in Asia-Pacific. But finding a strategy that successfully caters to the needs of a growing business in emerging markets with the right kind of capital structure can be a difficult balance to strike for treasurers. “Before [the crisis] you could create a long-range plan based on flows and more certain dynamics and direct your foreign exchange (FX) strategy and revisit annually,” said Shane Fitzsimons, GE’s CFO for global growth and operations. “You may, for example, have been operating in fewer countries with more stable currency relationships. In today’s more global economy, you have to be more nimble and alert to changing events and be in a position to respond accordingly.”
The region’s burgeoning intra-Asia trade growth means firms have to be more aware than ever of the importance of managing currency fluctuations and appreciation, particularly when it starts affecting their bottom line.
“We have continued to see strong interest in risk management and specifically FX risk management practices in recent years,” said Mark Burrough, head of foreign exchange product management, Asia Pacific, J.P. Morgan treasury services.
“As corporations expand their presence into new markets and establish a more regional or indeed global footprint, they are re-engineering their internal risk mitigation policies and procedures. Many multinational corporations have had existing risk management frameworks in place, but from our perspective, we have seen corporates grow in sophistication, driven by an increasing awareness of the need for different risk management strategies. And a lot of this has been driven by the need for information.”
Market volatility and the continued turmoil in Europe’s sovereign debt markets have dampened corporate appetites for more complex structured derivatives, with firms opting for a simpler range of hedging instruments, made up principally of forwards with some options and stop-losses.
“The hedging tools we use have broadly speaking not changed, and simpler is always better, but there is definitely a greater need for more visibility around, for example, daily cash positions and currency flows as volatility has increased,” said Fitzsimons.
“Our role [as treasurers] has always been to mitigate risk and in this regard our role has not changed a lot. We have had to get used to more volatility that’s true, but there has always been some volatility depending on where your businesses were.”
For firms wishing to hedge in renminbi the opportunities are growing thanks to increased onshore investment opportunities adding to the renminbi liquidity pool in Hong Kong. Companies with trade-related onshore renminbi payables on mainland China can access renminbi in the offshore market and remit back into the mainland. And subject to any clearing bank quotas, firms with trade-related CNY receivables in Hong Kong can access the onshore US dollar-renminbi rate. Indeed, companies are in the privileged position of being able to take advantage of both onshore and offshore renminbi markets for hedging.
For Asian companies with trade flows between Hong Kong and China, it makes sense to use renminbi. Many such local firms are doing just that, and say they are more than satisfied with the results. But for multinationals not run out of Hong Kong, and that also have a global operational footprint and therefore plenty of scope for natural hedging, the case is not so compelling.
Few multinationals are among the first movers concerning renminbi, preferring to wait until the regulations are more settled and the environment is more stable. They continue to transact largely in euro and dollars. “If the rules change we can’t react quickly enough and it would negatively impact our businesses, but I am looking forward to using the currency more in the future,” said Wolfgang Ratheiser, corporate treasurer, Asia Pacific/Middle East at Johnson Controls.
Regulatory headaches
It’s not just how best to navigate volatile markets and talk of currency wars keeping treasurers and CFOs awake at night. Another major issue for treasurers in FX risk management is how to comply with US generally accepted accounting principles and hedge accounting regulations in capital-restricted countries. Specifically, FAS (financial accounting standards) 133 as issued by the Financial Accounting Standards Board and which requires companies to measure all assets and liabilities on their balance sheet at fair value, can cause complications. “Sometimes you hedge an economic exposure but in doing so you will create an accounting exposure because you can’t reflect it in your books effectively according to FAS 133,” said Ratheiser. “This is particularly so in Asia where many major markets have currency controls.”
Ratheiser’s solution was to switch to a new treasury management system (TMS). “We also streamlined our processes further by integrating our TMS with our payment platform in order to be in a better position to comply with FAS 133,” he said.
Most treasurers in the region agree on one thing: that their jobs are in many ways tougher than equivalent positions in the US or Europe. Liquidity risk, which can affect a company’s ability to conduct short-term business, still ranks as most treasurers’ number one concern, but FX risk is not too far behind.
In addition to the variety of currencies and regulatory regimes with opaque and changeable rules, many of the biggest and fastest growing markets also have strict capital restrictions. And while the North American market was always bigger, implying more risk, even that is now changing.
“Asia is catching up in terms of business volume,” said one corporate treasurer.
“We have doubled our revenues in business in the four years since I came over to the region to work, and the downturn in the US and Europe and means the gap is closing even faster. However, the regulatory challenges involved in FX hedging are if anything getting harder.”
This story was first published in the Cash Management Yearbook supplement to the November 2011 issue of FinanceAsia magazine.
