China Trade Finance 2016: A closer look at the trends and issues shaping the market

TFM welcomes this guest post from Zennon Kapron, head of KapronAsia, which provides banking, capital markets, payments and cryptocurrency market research across Asia.

The volume of international trade has steadily risen over time as the world has become increasingly connected. Despite a slowdown in the period after the 2008 global financial crisis, trade volumes have since resumed strong growth, with volumes slowing recently, but still far above crisis levels.

As global trade expands, so does the importance of trade finance. This is especially crucial in the world’s largest exporting nation. Trade financing is typically viewed as letters of credit, lending, export credit and insurance, usually offered by traditional banks and export credit and insurance agencies. However, fintech and the internet have been changing the face of trade finance. For instance, Barclay has announced the first trade finance deal using Blockchain-based technology in September this year, which increased efficiency in the process. In addition, more and more international trade in retail is conducted through online marketplaces such as Alibaba and eBay. These new technologies are reducing paperwork and increasing the speed of communication between companies, banks, and other counter parties.

Technology aside, trade financing is also becoming a buyer’s market, as supply of goods exceeds demand. Buyers prefer more simplified settlement processes, less up front money requirements and lower handling fees. As a result, the use of open accounts, especially in retail transactions, is growing fast and will likely continue.

Kapronasia’s new report takes an in-depth look into these issues and analyzes how trade finance is changing in the world’s largest exporting economy. Total trade volume in China was 24.59 trillion RMB ($3.95 trillion) last year, even despite a fall in import and export volumes.

Going forward, we believe trade finance in China is set to grow, thanks to the growing internationalization of the RMB, Chinese government policy decisions, and additional lending by online banks.

The Rise of RMB Trade

  • The Chinese currency is playing a more prominent role in global trade today than ever before. The RMB is now the second-most used currency for trade finance in the world, up from 17th position in April 2010. As a result of growing trade flows with China, there has been a greater demand for traded products and services denoted in RMB globally. Add to that expectations that China will further open up its financial markets, the RMB’s market share in trade settlement is only set to grow.

Favorable Chinese Policy

  • Policy decisions such as the Chinese government’s recent ‘one belt one road’ policy, introduced in 2013 to encourage increased trading and closer ties with countries in Asia, Europe, and Africa, is likely to fuel more demand for exports and in turn, more trade finance. We also predict trading volumes will shift from basic commodities to more high tech products and labor contracting services, as Beijing has been emphasizing a ‘cut overcapacity and excess inventory’. In this aspect, trade finance would be key to providing support to exporters and importers.

Digital Banks Provide New Lending

  • Led by its initiative to finance SMEs, Alibaba has also brought its affiliate Mybank into the competition with other online banking platforms. Mybank was set up in June 2015, and registered with capital of 4 billion RMB ($612 million). It provides financial assistance to small and micro business as well as online consumers. At present, Alibaba’s Mybank provides loans only to Chinese SMEs to finance cross-border transactions, and has set the aim to support 10 million such companies in the future. To achieve this plan, Alibaba also launched its own credit checking system, which is called Sesame Credit. The availability of credit will serve to help more Chinese SMEs trade internationally.
  • Furthermore, the development of new Chinese digital banks and the integration of e-commerce and finance is also leading to new sources of trade finance, helping to grow the industry. For example, Alibaba Group, whose founder Mr. Jack Ma was recently named Special Adviser of UN Conference on Trade and Development, entered into partnerships with more than 25 banks and credit rating agencies around the world in order to make cross-border trade financing available for Chinese SMEs.

Beyond the trends described above, there are more interesting developments in China.

KapronAsia’s report on China Trade can be purchased here

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