What’s trending in working capital funding and risk management?

With interest rates still a key concern, how can multinationals leverage regional treasury structures to lower funding costs?

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At the start of 2024, interest rates remain top of mind for the treasurers of multinational companies. The US rate hike cycle since 2022 has transformed the funding landscape globally, causing a significant interest rate differential across many Asian economies.

Given the traditional reliance on USD borrowing in the region, treasurers are increasingly leveraging this gap to optimise funding costs and working capital efficiencies.

A clear differential

The differential is particularly stark in the world’s two largest economies. In the US, the policy rate is 5.33%, compared to 2.65% in China – leading to an interest rate differential of more than two percentage points.

The existence of a significant rate differential allows treasurers to optimise borrowing costs by tapping into less costly sources of capital while managing the associated foreign exchange exposure accordingly.   

An indirect consequence of the current rate environment is the potential for currency volatility, and with the Fed’s still uncertain timing and magnitude of its likely rate cut, 2024 could prove volatile for some currencies in Asia. FX risks can, however, be reduced by having the right hedging tools in place.

A case in point: optimising liquidity management for multinational businesses

The lower cost of funding in China offers opportunities for multinational businesses. Having previously borrowed in China to fund local operations, multinationals can now raise funds in the country and finance activities in other markets that have a higher cost of borrowing.

Louise Zhang

For multinationals with sizable operations or value chain in China, it has become imperative to integrate RMB into their regional and global treasury structure.

Louise Zhang
Head of Transaction Banking, China, BNP Paribas

For multinationals with sizable operations or value chain in China, it has become imperative to integrate RMB into their regional and global treasury structures. Onshore RMB cash from funding can be centralised offshore through cross-border liquidity management solutions, typically with Hong Kong as the regional hub. Cross-border cash concentration is also leveraged by APAC regional treasury centres to effectively manage balances across regions, for example, between Hong Kong and Europe. Via automated sweeps that require no manual intervention, companies can sweep surplus funds to and from a single header account in Hong Kong. This type of structure supports treasury centralisation by automating intercompany lending and results in more efficient investment of surplus balances in the header account.

These liquidity structures effectively centralise FX management, allowing treasurers to manage multiple currency positions at a portfolio level and integrate with the company’s hedging programme. From there hedging instruments of different tenors and structures could be deployed.

Waini Chan

These liquidity structures effectively centralise FX management, allowing treasurers to manage multiple currency positions at a portfolio level and integrate with the company’s hedging programme. From there hedging instruments of different tenors and structures could be deployed.

Waini Chan
Head of MNC Corporate Sales, Global Markets, BNP Paribas

Centralisation and automation

As Chinese companies expand overseas, they also benefit from this holistic approach. For example, one of our Chinese clients was looking to eliminate manual treasury activities – such as manually funding its European entities’ accounts from Hong Kong and sending back surplus funds in the other direction – and gain visibility on its cash positions across its overseas entities.

To address these challenges, BNP Paribas established a cross-border cash pool for the company, covering Europe and Hong Kong, which automates its European funding needs, while offering higher yield arrangements for surplus funds. At the same time, interest expense and income posting for accounts under the cash pool are automated through host-to-host connectivity with the company’s Enterprise Resource Planning (ERP). Meanwhile, offshore FX exposure is captured and managed by treasury staff at the headquarters.

The benefits to the company are clear: automation ensures that the treasury team has more time for other tasks, while the scalable structure of the solution is able to support the company’s growing business needs in Europe.

Timothy Lee

For an international business operating in multiple markets, each with their own cash management needs and funding costs, the benefits of a regional treasury hub can be felt across the entire company.

Timothy Lee
Head of Transaction Banking, Greater China, BNP Paribas

By implementing a comprehensive solution, a treasurer can enjoy enhanced productivity, greater transparency, as well as significant cost savings and improved working capital management. For an international business operating in multiple markets, each with their own cash management needs and funding costs, the benefits of a regional treasury hub can be felt across the entire company.