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Beef up regulation of trade finance: Experts

By Wang Xiaotian  (China Daily)

10:06, February 26, 2013

The authorities should strengthen regulation of trade finance provided by non-financial institutions and draft corresponding rules to prevent risks from piling up, said bank executives and analysts.

"Banks are facing rising competition from e-commerce and logistics companies in terms of providing financing services for traders, which would promote service innovation and upgrading among lenders in the long run," said Chen Siqing, a vice-president of Bank of China Ltd, one of the country's four largest State-owned lenders.But the risks are also piling up, said Chen.

"The development target and risk management standards of non-financing companies are quite different from those of banks. Therefore regulators should enhance supervision of such trade financing activities."

E-commerce companies have been entering the financing business in recent years. Alibaba Group Holding Ltd, China's biggest e-commerce company, has provided nearly 30 billion yuan ($4.81 billion) in credit to 130,000 trading enterprises since it launched its small-sum lending business in 2010. Its payment platform Alipay conducts daily clearing valued at more than 300 million yuan.

Another Chinese e-commerce giant, 360Buy, announced in November the launch of supply chain financing services for goods suppliers. It even extended the business to the preservation and appreciation of trade capital, such as selling mortgaged accounts receivable from one supplier as a wealth management product to other suppliers to make a profit.

These non-financial companies are accelerating their penetration of the field, based on their information and technological advantages, and strong electronic trading or logistics distribution platforms, Chen said.

Trade finance refers to financing trading transactions, including trade credit and insurance guarantees. Around 80 to 90 percent of world trade relies on such services, mostly of a short-term nature, according to the World Trade Organization.

Liu Xinyi, executive vice-president of Shanghai Pudong Development Bank, said the trade finance business is of great significance to lenders as it creates low-cost liabilities and extends other revenue opportunities.

"It's the business that could bring the most consolidated income. In addition, banks could have a better idea of enterprises' operational situation through trade finance services, which improves risk management."

But the business also generated potential risks as lenders hand out credit without proper mortgages, and certain financing activities were not based on real trade transactions, said Yang Zaiping, executive vice-president of the China Banking Association and an inspector of the China Banking Regulatory Commission.

"Therefore, trade finance needs strengthened risk management, and institutions providing such services should closely track the capital and logistics flow related to enterprises' purchasing, producing and sales activities," he said.

Yang added that global and domestic economic uncertainties have highlighted the need for tighter controls on trade finance.

"When the economy is going upward, the value of mortgages usually appreciates, and it would be fine if lenders are simplify financing operations. But when the economy fluctuates, it would be hard not only to control risks, but also to monitor clients' actual operating conditions," said Liu.

Rampant development of trade finance could also threaten the macroeconomic environment, said Guo Tianyong, a professor at the Central University of Finance and Economics.

Trade credit between enterprises and trade finance from banks accounted for the majority of China's short-term external debt in 2012, said Fang Wen, deputy director of the Balance of Payments Department at the State Administration of Foreign Exchange.

Analysts have warned that regulators must watch fast-growing short-term liabilities as rising external debt may undermine China's fiscal position and cause economic damage.

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