China Three Gorges Corporation (CTG Group) was incorporated in 1993 for the construction of the Three Gorges Project and the development of the Yangtze River, with business operations now spanning across Europe, South America, Africa, and Southeast Asia.
CTG Group has started its expansion into the European and South American markets since 2011. In order to support the rapid growth in overseas investment and business expansion, it is crucial for the group to have a prudent global treasury structure as a foundation to ensure control over overseas funds and enhance treasury management efficiency.
The Three Gorges Finance (Hong Kong) Limited (“CTC”) was set up in Hong Kong as the header account of the Hong Kong cash pool and global cash pool. In this three-layer cash pooling structure, the base layer comprises settlement accounts in Europe with zero balance sweep and minimum balance sweep set up for different sub-accounts. Funds are concentrated into an offshore account of the Hong Kong CTC in Luxembourg, and then further concentrated into the ultimate header account in Hong Kong by manual sweeping.
For the Hong Kong cash pool, funds from Hong Kong entities are concentrated automatically into the header account with zero balance sweep. To fulfil payment obligations of the pool sub-accounts in Hong Kong, a transaction-based downward sweep is set up such that when payment is initiated in any sub-account, funds will be pulled from the header account to complete the payment.
Global accounts are added onto the global online banking platform for the Hong Kong CTC to centralise enquiry and payment. Currently, accounts from close to 20 countries are added to the platform, including Luxembourg, Portugal, Indonesia, Philippines, Malaysia, and Brazil.
CTG Group viewed Hong Kong as the preferred location for setting up a CTC to ensure overseas funds safety and support business expansion. Through the Hong Kong CTC, the group can achieve greater visibility over liquidity and fund flow data by leveraging the partnering bank’s global network. This translates into more effective and efficient decision making on overseas expansion at the headquarters.
In addition to centrally managing subsidiaries’ funds, a CTC in Hong Kong also enables investment opportunities with higher return, bulk foreign exchange transactions, and centralised risk management that substantially benefit the global operation of CTG Group. The CTC also optimises CTG Group’s tax structure leveraging Hong Kong’s double tax treaty network, and provides a cash management structure that is flexible to fulfil local needs.
The transaction-based downward sweep is an innovative cash pool design in the market. Once a payment is initiated in the cash pool sub-account with insufficient balances, funds will be pulled from the header account to the sub-account to complete the payment. Limits can be set for such fund pulling. Furthermore, the hybrid sweeping set-up used in the European cash pool provides flexibility to the group’s operation. Various sweeping modes, such as automatic zero balance sweep, minimum balance sweep, fixed amount sweep and manual sweep, are all available for different sub-accounts within the same cash pool.
In addition, the three-layer cash pool has utilised the double tax treaties between Hong Kong and Luxembourg, and between Luxembourg and other countries in the European Union, which saves the cost of tax expenses for the daily sweeping. The choice of cash pool header location in Hong Kong has optimised geographical advantage and taxation benefits for the group.
China General Nuclear Power Corporation (CGN Group) is a large-scale clean energy group established in 1994, with over 800 member companies located across China and overseas regions, and its “going-out” business spanning across Asia, Africa, Europe, and America.
As CGN Group continued to expand across different markets, it sought to streamline member companies’ treasury activities and safeguard its offshore liquidity by centralising cash management within the group. The group saw the need to establish a treasury management structure that would create collective value for the group and member companies through providing higher interest on deposits, lower cost on lending, and nil settlement cost comparing to banks.
Established in 2010 in Hong Kong, CGN Huasheng Investment Limited (CGN Huasheng) is CGN Group’s sole offshore cash management centre (“CTC”). It is responsible for centrally managing the group’s offshore liquidity and treasury activities including payment and settlement, foreign exchange, cross-border and offshore lending, financing, investments, and hedging.
To serve CGN Group’s need to manage offshore funds and CGN Huasheng’s daily business need, CGN Huasheng built a four-layer cash pool structure with a key header account, connected internally with the group’s onshore headquarters and externally with overseas subsidiaries. Through Hong Kong-based sub-accounts created for offshore subsidiaries with the partnering bank, the CTC centrally handles all transactions with external parties. The subsidiaries are also paired with local accounts with the partnering bank to fulfil their daily operational needs.
Within the Hong Kong cash pool, end-of-day balances in offshore subsidiaries’ sub-accounts are automatically concentrated to CGN Huasheng’s header account. When subsidiaries need to pay external parties, they submit requests to the CTC via the internal banking platform. Upon approval, funds will be transferred to the sub-accounts to complete the payments, subject to transfer limits controlled by the core business system. When the balance of local operating accounts reaches a certain threshold, funds can be manually swept to the CTC’s header account.
To further streamline the treasury procedures, the core business system is directly connected with the partnering bank, which enables a single portal management of multiple accounts. Overseas subsidiaries can handle cash concentration and daily liquidity settlement by fully electronic means.
From the perspective of internal management, CGN Huasheng has propelled CGN Group’s overseas expansion and globalisation through centrally managing its offshore liquidity and financing needs of member companies. The CTC monitors the safety of liquidity in offshore accounts and commences investment business in a safe and prudent manner with a view to retaining or adding capital value. It also provides professional and integrated financial services for member companies. Since its establishment, the CTC has participated in almost all of CGN Group’s overseas acquisitions by providing initial funding and related foreign exchange services.
Hong Kong provides a multitude of advantages: no restrictions over capital movements, transparent information flow, efficient government bodies, robust banking system and capital markets, geographical and cultural proximity to the Mainland, etc. Hong Kong’s withholding tax and corporate treasury centre tax regime are also favourable for CTCs to set up in the region with lower cost. The CTC tax incentives introduced by the Hong Kong SAR Government in 2016 has increased Hong Kong’s competitiveness as a CTC hub.