With a financial market growing rapidly, ensuring strong working capital management has become a target for operational returns and shareholder value in China. Our focus is on managing working capital in China.

Although, most Chinese firms are financially constrained and still have limited access to long-term debt and financing solutions, the recent reforms have lead the development of new credit lines. The growing development of “trust loans” is a concrete example.

Furthermore, there is need to pay attention to latest regulatory developments from the People Bank of China (PBOC), as well as from the State Administration of Foreign Exchange (SAFE). Indeed, foreign exchange may impact the cash conversion cycle and as matter of fact the working capital of companies with cross-border businesses.

This creates both challenges but also opportunities for managing working capital in China.

In order to avoid the feeling of “trapped cash”, several liquidity management products are available on the market. Since 2012, the SAFE has been more open and flexible on the rules governing foreign exchange administration. Simplified rules better allow multinationals to manage their liquidity effectively. The SAFE has also implemented new rules relating to equity financing transactions for foreign and domestic firms, such as “special purpose companies” offshore purpose.

Moreover, in China, liquidity management can be achieved through two entrusted loan methods: intra-group and 3rd party entrusted loan. Cash pooling is also available through an entrusted loans in RMB and foreign currency (US dollar, Euro and Hong Kong dollar). Target balance sweeping, commonly called RMB daily cash concentration can also be used part of the entrusted loan structure and then manage a working capital actively. Foreign currency funds pooling or RMB funds pooling are also widely available on the market, at the Agricultural Bank of China or again at the Bank of China.

In China, the entrustment loan framework as a liquidity management solution must be used in order to move cash to other legal entities. It is also important to remind that due to the complex structure of this product, a due diligence is often a must in order to avoid any bad surprise which may not only impact the company but the whole financial system.

However, often difficult to understand, main issues should be addressed regarding the entrusted loan structure.

Because the Banking system is not yet widely located in whole part, the reliance on bill (paper) is still the common method of payment. Investing in operation technology and E-payment could help maintain shorter time collection from customers.Also, because the banking industry is fragmented in China, companies willing to operate in different industry will often be required to maintain an account in each sub-branch, by local government and per se lead to longer time collection.

Another way for managing working capital in China is through working Capital loan which can help manage short term (often up to 1 year) or seasonal RMB needs in China and then optimize the working capital. For longer term, term loans are available in China with flexible repayment options.

Another aspect of cash management that may be used to manage one’s company working capital concerns the supply chain finance products which also available in China for both domestic and international trade.

From an inventory management perspective, optimizing and managing working capital in China means choosing the right inventory methods (LIFO/FIFO) depending on the accounting methods used as well as on the macroeconomic environment. Should also be taken into consideration, the large number of suppliers in China which may lead to duplicate them in the inventory system of a firm and therefore lead to inefficient working capital and days payables outstanding. Another bad point often seen in China concerns the inventory of raw materials. Too often, companies rely on inaccurate forecasting due to false information or promises given from suppliers.

Due to globalization, many foreign companies in China conduct import-processing business for processing and export the final goods. These companies hold very high stock of investments are affected by exchange rate. Considering taxes on import/export, one company could stock inventory within a bonded warehouses to defer payment of import duties or VAT until the merchandise are need to be used

In summary, investing in technology and internal control system, although at a cost is a positive way to balance conflicting objectives and working capital targets. It is a key to optimize your managing working capital in China.

See also: accounting in Shanghai and Beijing

WFOE China

Beijing - Shanghai - Shenzhen - Hong Kong - Paris

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