Finance companies are an increasingly important part of China's financial system. This is particularly so as China pushes ahead with financial reforms that promote competition in the financial sector and increase the role of the market in setting interest rates and the renminbi exchange rate. According to data provided by the China Association of Finance Companies, after nearly 30 years of expansion, finance companies had combined assets of 4,760.4 billion yuan as of the end of 2016 with owner's equity of 673.4 billion yuan. Non-performing assets were a tiny 0.03%, while the capital adequacy ratio reached 21.25% and provision coverage reached 3303.79%.

 

With the growing maturity of China's financial market, finance companies are moving into new businesses, including the issuance of financial bonds, providing global sweep accounts for multinationals and offering international supply chain financing. As more and more domestic enterprises move into the international market, finance companies are playing an ever greater role in China's financial environment. 

 

Finance companies got their start in developed Western economies, and there is a considerable amount of research on the role they have played as the treasury platform for enterprise groups. Much of their experience may be applicable to the China market.

 

According to the Enterprise Group Finance Company Management Measures, China's group finance companies mainly focus on centralized management of corporate funds and the provision of financial management services to corporate group members. Unlike banks, finance companies have risks that are concentrated within their group. This means risks are relatively controllable -- assuming the group itself is financially healthy -- and there is less likelihood of systemic risk from finance companies. 

 

However, as Chinese companies "go out" into the global market, there are more obvious shortcomings in the operations of the nation's finance companies. Risks are largely concentrated in business transactions, and interest rate risk and exchange rate risk are among the chief areas where risk needs to be scrutinized.  

 

Han Ling, deputy general manager at Siemens Financial Services, said that the centralized management framework at Siemens' treasury operations is comprised of three key segments: management, implementation and control. She said that for management, the company clearly confers administrative authority to the treasurer.

 

For implementation, the treasurer can deal with both internal transactions and external payments. For control, the central treasurer needs the corresponding internal auditing to continuously monitor compliance with existing laws and regulations. This is a key measure for performance assessment of the operations of subsidiaries.

 

One company with a wealth of experience in dealing with these risks as they apply to members of an enterprise group is Siemens Financial Services Ltd. In recent years, Siemens Financial has accelerated the pace of its centralized treasury management operations, and the company's experience could serve as a handy reference for many of China's own enterprise groups.

 

Matthias Plenio, executive director and general manager of Siemens Financial Services, told reporters recently that the financial needs of Siemens across its various business areas in China are similar to those of domestic groups. In some cases there is a shortage of funds while in others there is a surplus of deposits. Moreover, all group members with foreign currency business need foreign exchange risk management. 

 

As an enterprise group's "internal bank," a group finance company firstly provides settlement as well as capital pooling, capital monitoring and other financial services. The finance company can also offer integrated foreign exchange management and financial services, such as foreign currency deposits, foreign currency loans, and foreign currency pooling as well as settlement and remittances for group members. 

 

Making use of effective internal and external control methods, finance companies help group members keep abreast of financial hedging tools of the foreign exchange market to help mitigate foreign exchange risks in production and other business areas. At the same time, these companies need to build cross-border renminbi capital pools, and facilitate the channels of the capital pool for domestic and foreign currencies of the financial companies, while integrating and co-coordinating capital management. This is to create a fast, efficient and convenient centralized management platform for foreign exchange funds.

 

In particular, risk identification is the first step of foreign exchange risk management. Siemens Group has issued detailed guidelines for foreign exchange management for its global companies. The group has uniform requirements for hedging, the extent of hedging and the method of calculating foreign exchange exposure risks. In actual practice, the regional treasury center takes responsibility. In China, Siemens Financial Services focuses on the foreign exchange risk of all enterprises, and actively carries out spot settlement and sales business with financial licenses. It monitors long-term and swap foreign exchange rate risk management, to deliver more efficient services for the member units. 

 

At the same time, the company provides foreign exchange business consulting and regular foreign exchange management training, including the signing of business contracts. When it comes to specific projects, at the start of the bidding phase, the company helps sales managers calculate the exchange rate to determine the hedging costs. In addition, the company installs a currency manager for al