Out of the dependencies
26 September 2022
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Regional crises are increasingly becoming a challenge. For example, potential risks are emerging in business with China, and treasury has a key role to play in analysing them. Coronavirus pandemic, the war in Ukraine, energy shortages, supply chain bottlenecks — crises have increased in nature, size and frequency worldwide. For a long time, pandemics or armed conflicts have been regional events from a German point of view, with limited effects, mostly for the companies operating in these areas. However, recently the lockdowns in China to combat the coronavirus pandemic or the Russian attack on Ukraine have had global effects and put many business models to the test.
The effects of further lockdowns or other events affecting supply chains to and from China would have a major impact on the German economy: In 2021, China was the second most important customer for German goods after the USA, with a volume of €103.7 billion. On the other hand, China is in first place with regard to imports to Germany at €142.3 billion.
Will China become the next source of risk for German companies? After all, according to a joint survey by the German Chambers of Commerce Abroad and KPMG, around 55 percent of German companies operating in China fear the negative effects of "decoupling" on their business. For more than half a year, companies have been increasingly drawing conclusions from the experiences of the coronavirus pandemic and questioning their strong dependence on their Chinese business.
A question of financing
Dealing with such risks will also determine the treasurer's work in the coming years. Firstly, there is the question of which areas will need funding in the future. The disruption of important supply chains due to pandemic measures has brought the risks of "just-in-time logistics" to the attention of companies. The development of strong local storage capacities and increased storage, which is detrimental to the cash flow, would be a logical consequence from the point of view of local companies. But the construction of production facilities outside China also makes pre-financing necessary. Many companies are still taking a wait-and-see approach to these issues, but long-term materialisation of demand is likely.
In 2021, China was the second most important buyer of German goods
On the other hand, there is the question of how to meet short- and long-term financing needs. At times, it is conceivable that for political reasons, China might stop buying bonds and debt security, for example. The Treasury should therefore create transparency about previous sources of financing and investors at an early stage and thus identify potential requirements and dependencies. This step is also advisable for banking partners. For them, this is not just about the economic situation of the customer.
Similarly, the Treasury should raise management's awareness of possible financial implications with regard to dependencies on China at an early stage, while at the same time adjusting the financing structures and establishing appropriate buffers for uncertainties. Banking partners should also be brought on board. This will allow them to adapt their risk considerations and to purposefully contribute their own expertise in transition financing.
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