Philips revitalises treasury with market-first cross-currency netting solution in China

The company

Royal Philips (NYSE: PHG, AEX: PHIA) is a leading health technology company focused on improving people's health and well-being through meaningful innovation. Philips’ patient and people-centric innovation leverages advanced technology and deep clinical and consumer insights to deliver personal health solutions to consumers, and professional solutions to healthcare providers and their patients.

Headquartered in the Netherlands, the company is a leader in diagnostic imaging, ultrasound, image-guided therapy, monitoring and enterprise informatics¹, as well as in personal health. Philips generated 2023 sales of EUR 18.2 billion, and employs approximately 68,700 employees, with sales and services in more than 100 markets².

The challenge

As a global multinational organisation, centralisation, standardisation, and simplification of treasury processes are key priorities for Philips. This is why the company operates an in-house bank (IHB) in the Netherlands that provides netting, pooling, and other treasury services to Philips entities globally.

The company aimed to implement a single RMB cross-currency netting structure for all intragroup cross-border transactions involving Chinese entities, but with no precedence under mainland China’s existing regulations, Philips’ 9 entities (including 17 business units) in mainland China could not be integrated into the global netting structure. With over 4,000 intragroup cross-border transactions across seven currencies conducted annually, Philips’ team relied on manual processing of cross-border payments, with significant time, effort, and cost spent in both the mainland and overseas.

The solution

In collaboration with HSBC, Philips held rounds of discussions with the People’s Bank of China (PBOC) in Shanghai and ultimately obtained consent to roll out a market-first RMB cross-currency netting solution in mainland China. This leveraged Philips’ existing cross-border cash pool set up under the PBOC’s free trade enterprise (FTE) structure.

The groundbreaking approach taken by Philips reduces hundreds of multi-currency transactions in mainland China into a single RMB cross-border transaction, streamlining operational processes. Through the approved solution:

• Each month, the intra-group cross-border foreign currency payments and receipts related to the Chinese entities are converted into RMB using the IHB exchange rate. This serves as the basis for calculating the RMB netting settlement.
• The multiple cross-border transactions in different currencies within the same calendar month are netted into a single transaction, with RMB as the settlement currency. This is settled cross-border between Philips' domestic netting centre (FTE) and the Group's overseas netting centre.
  At the same time, each company or division settles a single netting transaction in RMB with the domestic netting settlement centre (FTE).

Regulators in mainland China continue to ease ways of doing business and open doors for corporates to connect their treasuries globally. The integration of the mainland Chinese entities into Philips’ group IHB structure not only fosters greater centralisation of treasury processes but also creates potential opportunities for overseas entities to utilise RMB as a trade currency, achieving greater efficiencies in FX management.

Meaningful impacts

• A market-first cross-currency netting structure, recognised by local regulators, that aligns with China’s strategic efforts to promote RMB internationalisation
• Optimisation of treasury outcomes by leveraging the existing structure:
  1. Integration of mainland China entities into the global netting process, further standardising and simplifying operational workflows
  2. Reduction of cross-border transaction volumes and associated costs
  3. Enhanced liquidity through unlocking working capital in mainland China and optimising cross-border settlement processes
  4. Improved FX risk management flexibility, with access to offshore renminbi (CNH) FX rates
• Streamlined, automated processes for payment and accounting