SPONSORED STATEMENT
Elke Doser, Associate Director, Supply Chain
and Trade Finance at UniCredit, Asia Pacific,
discusses the development of trade finance
products through the ages.
China’s trade
evolution
F
or many banks their oldest
division is trade finance,
a department that offers
documentary letters of credit
– a financial product that has
played an important role in international
trade for more than 100 years. Some
scholars even believe that its origins go
back to ancient Egypt and Babylon.
During this time, the letter of credit has
emerged as an extremely successful and
popular product to finance and lower the
risk of trade transactions. Today, about
10% of all international trade is still
supported by letters of credit.
Over the last two decades, however,
26 | GTR ASIA TRADE & EXPORT FINANCE SUPPLEMENT 2013
trade finance has experienced what is
sometimes referred to as a paradigm
shift. Thanks to the liberalisation of
emerging markets, the “borders and
boundaries” for open account payments
are now substantially lower. Proving more
flexible and, in particular, less costly than
letters of credit, open account payments
have become the settlement method of
choice for trading partners, accounting
for approximately 40% of global trade
settlements. Following this trend, banks,
credit insurers and other financial
institutions have launched supply chain
finance products. This “modern” method
of trade finance fills the financing gap
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SPONSORED STATEMENT
in terms of financing, payments, risk
mitigation and information flow – the
major characteristics of trade finance.
Supply chain finance
development in China
“IT IS STILL A COUNTRY
MAINLY BASED ON
TRADITIONAL TRADE
FINANCE.”
Elke Doser, UniCredit
previously covered by the letter of credit
and offers extended financing solutions
from order placement through payment
for both buyers and suppliers.
Regardless of whether the “traditional”
or “modern” method is employed,
trade finance’s general importance is
undisputed. It is estimated that 80 to 90%
of all trade transactions worldwide are
supported by some kind of trade finance
product. Looking to the future, the
World Bank expects global trade to grow
by 6 to 7% per year during the upcoming
years. Needless to say, this level of
growth represents significant business
potential for all market participants
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Asia is now the key focus for corporates
and financial institutions looking to
expand their businesses. Particularly since
the global financial crisis, companies from
developed countries have increasingly
turned towards emerging markets
for production and sourcing. This is
especially the case for China, despite that
fact that its GDP growth rate slowed to
7.8% in 2012, which has been interpreted
by many as an early sign that its economy
is slowing. The first quarter of 2013
showed signs of recovery, however, and
2013 growth is conservatively forecast
at 7.5% by the Chinese government and
8.2% by UniCredit Research. While it
remains to be seen how China’s annual
growth rate develops, the country
will indisputably continue to grow in
importance as a major trading partner for
the rest of the world.
Although approximately 70% of all
trade payments in China are already
done on an open account basis, the main
source of trade financing is still the letter
of credit. While larger and multinational
companies generally have access to
liquidity, it remains limited and/or costly
for small and medium-sized companies.
These facts represent ideal conditions for
providers of supply chain finance, which
enables smaller companies to access
additional liquidity based on their open
account payments.
Although supply chain finance is
an ideal tool for unleashing trapped
liquidity, some aspects require special
attention. First and foremost, proper legal
documentation is the foundation for the
successful implementation of supply chain
finance programmes. Although China has
a national legal system, legal decisions are
primarily taken on a regional basis, which
requires in-depth local legal know-how.
Some supply chain finance solutions
try to mitigate the so-called servicer risk
of the supplier (usually the financially
weaker party) by asking the buyer to
assume credit responsibility and allow
regress on that party. Such servicer risks
refer, for example, to dilution risks or
payment delays due to disputes on the
underlying supply contract. Major trade
finance banks can add value in this
respect. Their know-how and experience
in setting up supply chain finance
programmes and their local presence
and/or close correspondent relationships
with local banks can help to develop the
concept of supply chain finance and to
capture the existing business potential in
Asia and particularly in China.
Bank Payment Obligation
(BPO) – the next step
While open account or supply chain
finance has spiked in China over the
past few years and continues to increase,
another development or paradigm shift in
trade finance might bring further relief to
corporates in China hungry for liquidity:
Bank Payment Obligations (BPO).
A BPO is an irrevocable undertaking
given by the buyer’s bank to the seller’s
bank guaranteeing that payment will be
made on a specified date, provided that
electronic data matches the “base line”
that has been previously established by
the buyer and the seller. Thus, it is a
combination of a letter of credit, in terms
of risk mitigation by the irrevocable
payment undertaking, and an open
account payment, as it does not require
the bank to check the documents.
The BPO market is still in its infancy
and requires further investments,
particularly on the banking side. What
is particularly interesting for emerging
markets like China, however, are
the unified BPO rules, issued by the
International Chamber of Commerce
(ICC), which should avoid potential
discussions and disputes between
different legal jurisdictions.
While modern trade finance solutions
are developing in China, it is still a
country mainly based on traditional trade
finance, relying on letters of credit for
trade financing. This is understandable,
as traditional trade finance products have
proven to be reliable financing vehicles over
the last century. However, international
banks have started offering supply chain
finance services to Chinese companies,
closely followed by their Chinese
counterparties. Meanwhile, the latter are
making significant progress developing and
offering supply chain finance products and
BPO. With local and multinational banks
on the move, it surely won’t take too long
for the “modern” trade finance products to
become standardised, reliable products
in China and all over the world.
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