February 2010

Cash Management in China:

High Growth Market, Penetration of
SMEs Still Low
Hua Zhang
Beijing
hzhang@celent.com

A member of the Oliver Wyman Group CONFIDENTIAL | www.oliverwyman.com

Market Size
Market Size
Factors in the growth of cash management include:
 Major development of large companies.
 With changes in the business environment and in management concepts, many multinational companies and large enterprise groups are beginning to focus on improving use of funds, lowering costs, and increasing returns, which in turn generate the urgent need for banks to provide customized cash management solutions that are integrated, optimized, and personalized.
 The deregulation of RMB exchange rates has led to greater exchange risks, and enterprises would need the help of bank experts to manage interest rate risk.
 A stronger network and information exchange environment.
 Banks are providing more cash management services.

Marke t Siz e o f Cash Manag e me nt

30 Fe e Income 2,500,000

Numbe r of ca sh ma na ge me nt clie nts

25 Numbe r of cash ma na ge me nt clie nts
Fe e Income (USD bns)

2,000,000

20
1,500,000
15
1,000,000
10

5 500,000

0 0
2004 2005 2006 2007 2008 2009e 2010e 2011e

Source: Annual reports of various banks, People’s Bank of China, Celent

© 2010 Oliver Wyman  www.oliverwyman.com 3

Customer Segmentation
Penetration of Cash Management Services in China

 By the end of 2008, the cash management business had penetrated into 72% of bank deposits. However, only 26% of
corporate clients use cash management products, reflecting a much higher penetration rate among large enterprises
compared to SMEs.

Marke t Pe ne tratio n Rate fo r Cash Manag e me nt Pro ducts

100%
90%
80% Non ca sh
70% ma na ge me nt
60%
50%
40% Ca sh
30% ma na ge me nt
20%
10%
0%
De posit ba la nce Numbe r of clie nts

Source: CMB

© 2010 Oliver Wyman  www.oliverwyman.com 5

Cash Management for Large Enterprises

Numbe r o f Finance Co mpanie s Unde r Chine se Ente rprise Gro ups

90 Service-Oriented Settlement Model

80 Numbe r of
70 fina nce Subsidiary
compa nie s company 1
60 Treasury
Daily
50 settlement Management
Subsidiary
40 Finance company Group enterprise
company 2
30 Inde pe nde nt
20 fore ign finance …… Clearing bank
compa nie s
10
0
2006 2007 2008 Bank

Source: China Banking Regulatory Commission

Pro fits and Ove rse as Busine ss Pro fits o f Abo ve -scale (Sale s
Vo lume Exce e ding RMB 5 millio n) Industrial Ente rprise s Treasury Management Model
Group Profits
Subsidiary
400 Company 1
Ove rse a s Busine ss Profits
Daily Treasury
350
settlement Management
300 Subsidiary
Profit (USD bns)

Finance company Group enterprise

company 2
250
200
…… Get data from
150 bank
100
50 Bank
0
2002 2003 2004 2005 2006 2007

Source: National Bureau of Statistics

Source: Celent

© 2010 Oliver Wyman  www.oliverwyman.com 6

Cash Management for SMEs

Status o f Cash Manag e me nt Se rvice s fo r SMEs Banks Primarily Use d by SMEs fo r Cash Manag e me nt
Multina tiona l
ba nk with
subsidia rie s in
Only 1 ca sh Ma inta ins close
Asia a nd Europe Inte rna tiona l
ma na ge me nt re la tionship with ba nk with
12%
provide r provide r to subsidia ries a ll
25% ma ximize ca sh
ove r the world
utiliza tion Chinese ba nk
1%
37% with subsidia rie s
in China only Combina tion of
Fully re lie s on IT
72% the a bove
pla tforms of
Loca l ba nk, 10%
ba nks for its ca sh
Ba nk products ma na ge me nt a vaila ble only
from diffe re nt ope ra tions loca lly
provide rs 1% 5%
37%

SME's Assessment o f the Banks Used

Cash Manag e me nt So lutio ns Curre ntly Use d by SMEs

Facing global banks, local banks a re to Co ntro l Cre dit and Trade Risks
a ctively protecting their ma rket Cre dit insura nce
Sta ndby le tte r of
Ba nks maintain a close relationship with 2%
companies a s they provide deposit services cre dit
Va rie d cre dit
Facing financia l crisis, local banks are 7%
limits for
primarily se rving dome stic tra de
diffe re nt clie nts
Banks should re-position the mselves in the ir Comme rcia l
original role a s risk asse ssors 36%
le tte r of cre dit
Local banks do not ha ve the ne ce ssa ry IT 21%
structure

Mana gement te am of local banks are out

of touch w ith business nee ds
Ba nks do not conduct credit a nalysis on
individua l e nterprise s, but only on the Accounts
industry they are in.
re ce iva ble
Insufficient depth in banks' analysis of the
prospects of borrowers fina ncing
34%
0 1 2 3 4 5

Source: Celent China SME survey

© 2010 Oliver Wyman  www.oliverwyman.com 7

SME Cash Management Service Preferences

Bank Fe e Payme nt Me tho ds Sug g este d by SMEs

Fixe d cha rge s

0%

Combina tion of
the a bove
31% Cha rge s ba se d
on single
tra nsa ctions
Attitude s To w ard Purchasing o f Supply Chain Financial Se rvice s 46%

About to Ha ve purcha se d
purcha se 11% Cha rge s ba se d
11% on e a ch link of
fina nce cha in
23%
None of the
a bove
22%
Le ve l o f Inte g ratio n be tw e e n Cash Manag e me nt and Trade
Will purcha se Financing fo r SMEs
only whe n the re
a re cle a r re turns Inde pe nde nt
Will purchase Inde pe nde nt, but
45% 0%
11% both re porte d to
CFO
13%
Inte rre la te d
13%

Close ly re la te d
74%

Source: Celent China SME Survey

© 2010 Oliver Wyman  www.oliverwyman.com 8

Cash Management Products
 Cash Management Services in China

Payme nts in Cash Manag e me nt

100,000
Operating Units Re mitta nce ,
90,000

Pa yme nt sum (USD bns)

Colle ct ion
80,000
Liquidity management 70,000
Valuation management 60,000
Credit line management Ba nkca rds
Overdraft management 50,000
40,000
30,000
Clients / Suppliers Core account Financial institution 20,000 Bills
Collections and Investment and 10,000
payments funding management 0
management Risk management 2007 2008
Supply chain financing

Source: PBoC
E-commerce
Chain stores

Co rpo rate Financing Busine ss

Specific sectors

700

Sa le s Va lue (USD bns) 600

500

400

300

200

100

0
2005 2006 2007 2008
Source: Celent
Source: Celent

© 2010 Oliver Wyman  www.oliverwyman.com 10

 Liquidity Management

 In China, there are still some policy

Local currency
cash pool restrictions on the establishment of cash
Cash pool
Foreign currency pools:
cash pool
Fixed balance
– The General Lending Rules prohibit
pooling / distribution intercompany loans; only finance
Fund pooling
and distribution
Fixed sum
pooling / distribution
companies with the necessary permits
Fixed proportion are allowed to carry out intercompany
Internal transfer pooling / distribution loans. The method that is currently
Liquidity management
Overdraft limit adopted is one-to-one trust loans.
Credit line management
management Payment limit – Forex control: At present, only
management multinational corporations can operate
Internal fund
market management
foreign currency pools within China
Fund valuation using the trust loan structure, and they
Trust loan
must first obtain approval from the
Self-defined
interest rates
Foreign Exchange Administration.
Interest
management
Interest allocation
– Other controls: Listed companies in
China cannot provide funds for their
shareholders and other related parties
through the trust loan channel.

© 2010 Oliver Wyman  www.oliverwyman.com 11

 C+ Cash Management Business of China Merchants Bank
Cash
management

Accounts and Collections and Liquidity Investment Financial Risk

transaction payments management management management management
management management
Risk management
Local and foreign for internet
RMB deposits Basic services Trust loan Bank overdraft
currency cash pool Banking
Risk management
Online Fund balance Bank-fund Self-support for interest and
withholding management link loan exchange rates
Designated Bank-bond Domestic trade
Company card
cash pool link finance
Online corporate
Bill custody / Group accounts /
wealth Online
electronic bills Group payments
management insurance
Foreign currency
Group agreement
E-commerce wealth management Bills of
transfer
products exchange
Transaction
Domestic letter
differentiation International
of credit
system trade finance
Interbank cash
Offshore
management
settlement
system
Group treasury
International
management
settlement
platform

Notice deposits

Negotiable
deposits

Foreign currency
deposits

Notice deposits
Source: China Merchants Bank, Celent
Negotiable
deposits
© 2010 Oliver Wyman  www.oliverwyman.com 12
 Advantages & Disadvantages of Chinese Banks in Cash Management
Advantage Description
Advanced The technologies of Chinese commercial
technology banks are mostly comparatively new,
such as Internet banking.
Low service Chinese banks have a
charge settlement cost advantage when it
comes to clearing; foreign banks will
normally require the network support of
Chinese banks, resulting in higher costs.
Foreign banks will also incur higher labor
costs than Chinese banks.
Quick product Chinese banks are highly responsive to
upgrading the market and are equipped with agile
decision-making mechanisms, enabling
them to respond rapidly to market
changes.
Branch Chinese banks have a significant branch
advantage over foreign banks. Foreign
banks such as Citibank often require the
support of the branches and RMB
settlement system of Chinese banks.
Clients At present, Chinese banks have the
major share of corporate clients.
Adapting to local Chinese banks are clearly ahead in
needs terms of adaptation to local needs.
Source: Celent
© 2010 Oliver Wyman  www.oliverwyman.com
Disadvantage Description
Organizational Cash management traditionally requires
structure the support of many business units, so
foreign banks have gradually formed
cash management departments. As for
Chinese banks, where cash
management business started later, the
organizational structure has yet to be
fully consolidated.
Limited product Lower levels of expertise in investment
function services, strict government policies and
supervision, and the still-developing
financial market, cash management
products provided by Chinese banks are
not as comprehensive. The products
mainly cover liquidity management as
well as collections and payments
management, and account management
and information services will need
strengthening. As for investment
management, most of the products, such
as agreement deposits, are simple
deposit products with low yields and
absolute interest rates controlled by the
People’s Bank of China.
Financial The interest rates in China have yet to
supervision be fully marketized, and the interest
rates of trust loans still face high
restrictions.
13
Regulatory Considerations
 Regulations
Operations Relevant Regulations Key Points

Account Measures for the Administration of Bank Accounts, Provisions on the Corporate accounts are to be divided according to their characteristics; corporate
management Administration of Domestic Foreign Exchange Accounts deposit accounts are divided into basic deposit accounts, general deposit accounts,
temporary deposit accounts, and special deposit accounts. Depositors are not
allowed to open basic deposit accounts in multiple banks and organizations.

Management of Measures for the Bank Payment and Settlement, Anti-Money Laundering The tools for settlement include: cash, check, cashier’s check, bank draft,
collection and Law, Electronic Signature Law, Tentative Regulations on Cash Management, commercial draft, collection, etc.
payment etc.

Liquidity General Lending Rules, General Corporate Finance Rules, Measures for The lending interest rates of trust loans are to be defined through independent
management, Trust Loans, Tentative Regulations of the People’s Republic of China on discussion by both parties and shall not exceed the lending interest rates and upper
investment and Stamp Duty, Circular on Issues Concerning the Management of Internal limits set by the People’s Bank of China for the same period. Generally, the interest
financial Operations for Forex Funds in MNCs, Circular on Various Issues Concerning rates of trust loans are moving in the direction of being determined by enterprises
management Regulating the Communication between Listed Firms and Related Parties and independently.
External Guarantee by Listed Firms, Taxation Law, etc. A trust loan is a Finance companies that are separately established by enterprise groups shall not be
form of lending where funds are provided by the consignor such as a bound by the General Lending Rules.
government department, enterprise and institution, or individual, and are
released, supervised, and recovered by commercial banks in accordance with
the borrower, purpose of loan, amount, term, and interest rate defined by the
consignor. Commercial banks offering trust loan services can only charge the
handling fees and shall not assume any form of loan risk.

Security Electronic Signature Law, Guidelines for Electronic Payment, Measures for
the Administration of Electronic Banking, Provisions on the Management of
CSP Product Certification
The Sarbanes-Oxley Act and the Financial Services Modernization Act have
provided requirements and regulations related to information management and
security. At present, the laws on Internet banking transaction security in China are
mainly the laws and provisions for Internet banking, and online electronic payments
stipulated by the relevant State departments such as the People’s Bank of China and
the China Banking Regulatory Commission.

Forex Circular on Issues Concerning the Management of Internal Operations for Implementation of the administration on the filing of export prepayment and deferred
management Forex Funds in MNCs, Provisions on the Administration of the Settlement, payment for import.
Sale and Payment of Foreign Exchange, Regulations of the People’s
Republic of China on Foreign Exchange Management, etc.

Establishment of Measures for the Management of Finance Companies of Enterprise Groups, Relevant provisions for the establishment of finance companies and regional
finance Tentative Provisions of Shanghai Municipality Encouraging MNCs to headquarters.
companies and Establish Regional Headquarters, etc.
regional
headquarters

Source: CITIC

© 2010 Oliver Wyman  www.oliverwyman.com 15

Trends in Chinese Cash Management
 Trends
Trend Description

Application of Web 2.0 Creating an interactive experience that is more human and personalized.

Channel integration Further integrating channels such as phone banking, mobile phone banking, and call centers.

Stronger security and control Wider application of security systems such as digitalized signature and certificate verification.

Application of SWIFT Banks can provide enterprises with cross-border payment and global cash management services through SWIFT.

The number of groups increasing There has been an increasing demand for security, control, and liquidity of funds. Enterprises will place greater emphasis on the optimization of internal control and the effective
utilization of funds through the support of banking systems and mechanisms.

Expansion toward upstream and downstream Expanding from an individual enterprise to an enterprise group, and eventually to upstream and downstream supply chain enterprises.
enter-prises

Expansion toward SMEs For a period of time, the banking industry has been providing cash management services primarily to large group enterprises. However, there is a need for stronger payment and
AR/AP management and information services among SMEs.

Development in chain enterprises, B2C, B2B, Enterprises operating by the chain model have liquidity manage-ment needs that are similar to that of group enterprises. In the B2B e-commerce sector, the entry of banks and their
and B2G services is still relatively conservative and traditional. Payment, AR/AP, and custody services for enterprises have limited integration with bank ser-vices, and this may become a
growth area. Pudong Development Bank has achieved innovation and breakthrough in this aspect to become the first bank to provide professional B2B payment services in the
country through its cooperation with platforms such as Alib-aba.com, zj-steel.com, and Bsteel.com.

Development of the capital market The Chinese capital market is progressing rapidly, and there is an increasing proportion of financing methods for non-banking loans.

Liberation of exchange rates May result in greater fluctuation of exchange rates due to the complex foreign exchange environment.

Accelerating the progress of free RMB More multinational companies are showing a growing interest in foreign currency cash pools, cross-border cash pools, and multi-currency cash pools.
exchange

Developing from the core services of AR/AP, Enterprises are seeking personalized services, enhanced liquidity management, and value-added services. Banks will also promote their diverse services including trade financ-ing
payment and liquidity management toward and financial risk control during their promotional activities for cash management services to enterprises.
more services such as fund pooling, combined
interest, and multilateral trust loans

Management of interbank accounts Due to the lack of technology standards, there are many obstacles to the realization of the technical connection between different banking platforms. In the future, there may be a
cash management group that will work to achieve technology standards, like having the same interbank connection. China Merchants Bank has launched the cash management
service of interbank accounts management. In November 2009, the Bank of Beijing also launched the service.

Foreign exchange transactions Includes transactions involving foreign exchange derivatives, etc.

Cross-border cooperation An increasing number of Chinese enterprises are venturing overseas. On the other hand, with stronger communication between multinational companies in China and their parent
companies overseas, there is a growing need for cash management models and systems that are consistent both locally and internationally.

Stronger risk management 1. Liquidity risk: Increasingly complex structure of the financial mar-ket, more diverse investment tools, and higher investment risks. 2. Interest rate risk: Enterprises are required to
make prompt adjust-ments or maintain the interest rate structure of their huge assets and liabilities. 3. Exchange rate and country risk: An increasing number of enter-prises are
venturing into multinational businesses. 4. Rating risk: There is a growing need among enterprises for financ-ng without mortgage and guarantee so as to avoid downgraded credit
ratings, as well as higher costs. 5. Macroeconomic risks.

Customization An increasing number of enterprises are looking for personalized services. Industry-based cash management is not a simple set of cash management products, but a
comprehensive solution provided for enter-prises based on detailed customer needs so as to assist them in improving their internal processes and ensuring smooth cash flow from
upstream to downstream. On 22 October 2009, China Merchants Bank officially introduced its latest cash management solution for eight major industries in its 4th Annual
Conference on Cash and Treasury Management. The industries are multinationals, finance companies, manufacturing and sales, import and export, automobiles, real estate,
commodity trade centers, and public finance.

Outsourced services Besides cash management, banks are expanding toward helping enterprises in their financial management and other areas.

© 2010 Oliver Wyman  www.oliverwyman.com Source: Celent 17