Bank of China Eyes Trade Boost from Economic Upgr

By staff reporter Rong Rong and Wei Lingbo

B ank of China has long been known for its trade fi nance services. While sustaining this competitive advantage, the century-old bank remains innovative. Liu Yunfei, general manager of the Global Trade Services Department at Bank of China, discusses trends in the trade fi nance sector in an exclusive interview withChina Forex. She suggests that in order to achieve steady growth in trade fi nance, banks need to stick to the key principle of serving the real economy and take the lead in the transformation and upgrading of the domestic economy. Following are excerpts from that interview.

China Forex: Trade fi nance, a sector in which Bank of China has had a strong track record, is closely related to serving the real economy. In the current market environment, what is the status of the bank’s trade fi nance business, and what is the future direction of this business?

Liu: In the trade fi nance sector, Bank of China has actively implemented national strategies with a focus on serving the real economy. It has made signi fi cant strides in developing its business while controlling risk. In 2017, the non-interest income from trade fi nance increased considerably and the bank was ranked fi rst nationally in terms of its share of international trade and payments as well as cross-border renminbi transactions. Trade fi nancing in renminbi and foreign currencies climbed steadily and the bank made good progress in expanding its free trade zone business and commodity fi nancing business.

The bank showed good results as a main channel for China"s foreign trade and renminbi cross-border fl ows. In 2017, BOC group"s transaction volume in international trade reached US$3.95 trillion. The bank"s domestic institutions retained the largest market share in international trade services with a transaction volume of US$1.29 trillion.Additionally, BOC group"s transaction volume in cross-border renminbi payments reached 3.83 trillion yuan in 2017, maintaining the group’s leading market share.

In addition to serving the real economy,the bank supported the national policy of industrial transformation and upgrading. It improved its procedures for opening accounts and increased the ef fi ciency of its payment services. The bank addressed dif fi culties of small and medium sized enterprises in accessing fi nancing by providing "1+N" and"N+1" models for supply chain fi nancing to SMEs in the upstream and downstream chains of the core enterprises. The bank group actively sought to optimize its asset structure and earnestly acted on the central government"s requirement of"cutting overcapacity, reducing excess inventory, deleveraging, lowering costs and strengthening areas of weakness." It controlled the scale of credit granted to industries struggling with overcapacity while promoting trade fi nance business in industries closely related to the national economy and people"s livelihood such as equipment manufacturing,consumer products, pharmaceuticals and construction and engineering.

Additionally, the group shouldered its responsibilities as a major bank in supporting other key government policies.It coordinated its activities with the Belt and Road initiative- a key development program -- and expanded its network in participating countries. It also worked hard to become the preferred bank for China"s enterprises trying to "go global."The bank steadily pushed forward its efforts to boost the internationalization of the renminbi and actively promoted the use of the Chinese currency in trade and investment in countries participating in the Belt and Road initiative.Its transaction volume of cross-border renminbi payments between China and the Belt and Road countries totaled nearly 190 billion yuan in 2017. The bank supported free trade zone reforms. The bank set up commodity business centers globally and successfully increased the scale of its commodity fi nancing business.

Product innovation has been another important area. In the trade fi nance sector, Bank of China boasts the greatest variety of products and the widest scope of business among Chinese and foreign banks, and leads the market in many business areas. While continuing to improve its business procedures, the bank conducted research on the new trends of trade in the market such as "crossborder e-commerce" and "foreign trade comprehensive service platforms." It also pushed ahead with research and development on comprehensive fi nancial solutions in a bid to diversify trade fi nance products and strengthen market leadership.

The bank has also applied fi ntech to its business. The bank continued to upgrade its operating systems in line with product innovation and business development. It established and enhanced electronic channels such as online banking,mobile banking and "smart counters" so as to improve customer experience. The bank actively promoted the use of external data such as tax, Customs and shipping information,and advanced precision marketing and smart risk control through big data analysis.

The bank has also looked to improve its comprehensive risk management and control fi nancial risks. It adhered to the principle of "examining risks fi rst" in anti-money laundering efforts and held fi rmly to its compliance requirements. It conscientiously met regulatory requirements, took initiatives to enhance risk management capabilities, intensi fi ed risk control efforts for its key customers, key products, key regions and key industries, and expedited the disposal of NPLs. It held fi rm on its bottom line of "no systemic fi nancial risks"and continued to improve internal controls for the trade fi nance business.

As to the future direction of trade fi nance,by reviewing the practices of other banks and changing market trends, I believe that transaction banking will be the focus.

Transaction banking started to emerge in the 1980s and 1990s, pioneered by major international banks such as Citibank,Deutsche Bank and HSBC. These banks set up transaction banking departments to accommodate the changing demands of clients and to adapt to less favorable business environments. On the one hand, since the advent of globalization, corporate clients have started to undertake cross-border operations and demanded more comprehensive services from banks, e.g. cash management, shortterm fi nancing, multi-currency exchange services and custody services. On the other hand, in the US and European markets,banks were under increasing pressure to maintain a pro fi table business. The declining demand for investment in fi xed assets and the liberalization of interest rates both contributed to a fall in the pro fi tability in the banking industry.

The change in the market environment faced by Chinese banks in recent years is quite similar to what foreign banks faced when they initially launched transaction banking. As a result, many Chinese banks have begun exploring this area. China Merchants Bank, China Minsheng Bank, China Guangfa Bank and Shanghai Pudong Development Bank have all set up transaction banking departments, while others are conducting research on this area.

In the Chinese banking industry, a widely accepted de fi nition of transaction banking is stated as "a onestop comprehensive fi nancial solution throughout the transaction process of a client, which can help the client promote the integration of downstream and upstream resources and improve the effect and ef fi ciency of fund operation."

Generally, there are three patterns for setting up a transaction banking department within a bank — and these are function-oriented, customer-oriented and productoriented operations. Although the business scope of transaction banking differs signi fi cantly between banks due to different business focuses and client structures,all banks provide such services as account management,deposits, payment, trade fi nance, supply chain fi nance, cash management and corporate overdrafts. The transaction banking services of some banks even include corporate e-banking, working capital loans, wealth management, and clearing and custody services.

China Forex: Bank of China has made major breakthroughs in trade fi nance in commodities. How signi fi cant is the commodities business to the bank in terms of trade fi nancing?

Liu: With the rapid growth of its economy, China is relying more and more on foreign commodities. Chinese commodities companies are going global and actively engaging in derivatives trading through domestic and foreign commodity exchanges. Bank of China attaches strategic signi fi cance to its commodity business in response to national strategies.

Developing the commodity business is important to the bank in terms of serving the real economy. Commodities are indispensable to the national economy and people’s livelihood. On the one hand, developing commodity fi nancing and complementary fi nancial services will contribute to supply-side reforms and the upgrading and transformation of the economy. It will also help optimize the allocation of resources and achieve a dynamic balance between supply and demand. On the other hand, developing commodity fi nancing will help respond to the Belt and Road initiative by placing equal emphasis on "bringing in" and "going global" as well as by expanding imports and exports, so as to support Chinese companies in launching global operations and acquiring commodity resources.

Besides serving the real economy,developing commodity fi nancing will encourage innovation in the banking sector.First, the patterns of commodity trade are complex; different industries have different needs. That requires fi nancial institutions to foster innovation in product scheme and service model. Second, it will help upgrade the banking sector by increasing the income of intermediary businesses and transforming the pro fi t model. Third,it will help banks’ internationalization. The commodity trade is characterized by globalization, and this requires banks to keep up with enterprises that go global, to meet the overall needs of the enterprises’global industrial chain and to promote banks’ cross-border operations in line with international standards.

China Forex: How did Bank of China control risks amid the rapid development of its commodity fi nancing business?Where does the bank lag behind leading banks in the commodities sector and what will the bank do to address the disparities?

Liu: The healthy development of commodity fi nancing has to be backed by a compatible risk management system. We attached great importance to changing our risk management philosophy and increased our professionalism in commodity fi nancing risk management, so as to support business development and control risks throughout the whole fi nancing process.

First, Bank of China has established a professional risk assessment system. In light of the characteristics of commodity fi nancing, the bank has promoted the construction of a specialized credit management system for commodity fi nancing with debt facility ratings at its core. While assessing the fi nancial status of the lender, we focused on designing"closed-loop" structured products, put emphasis on the commodities and the trading process, and evaluated the self-liquidation of the commodity fi nancing project as a whole.

Second, the bank has made sure that it has dedicated personnel who are responsible for due diligence and the approval of all commodity fi nancing. This can improve the timeliness and professionalism of credit approval, and safeguard business development.

Third, the bank has enhanced risk monitoring by the middle of fi ce. It set up dedicated middle of fi ce teams in its commodity business centers. These teams are responsible for monitoring the risks of transactional and structured commodity fi nancing throughout the whole process by verifying the authenticity of the underlying transactions, meeting AML compliance requirements and monitoring the collection of receivables and cash fl ow, so as to ensure good asset quality of commodity business.

Fourth, the bank has actively promoted the construction of a professional market risk control system by strengthening industry research, optimizing the mark-to-market mechanism, undertaking real-time monitoring of commodity prices and mitigating the risk of commodity price fl uctuations through the use of hedging techniques.

Leading banks in the commodities sector like BNP Paribas and ING have worked in commodity fi nance for decades and have developed their own unique business models. Although Bank of China has made substantial progress, it still lags behind these key banks. First, Bank of China needs to further intensify and regionalize its commodity fi nancing operation. The bank has set up commodity business centers in Singapore, London,New York and Shanghai. These centers are focusing on local businesses and there is a lot for them to do to extend their business to the surrounding areas.Second, the bank needs to further increase its professionalism in credit assessment and approval.The commodities business requires extensive knowledge of the industry and risk mitigation techniques. Currently, the bank has a shortage of experienced credit approval personnel despite its efforts to build up its human resources. Third, the bank needs to further promote cooperation between its domestic and overseas institutions and between its investment banking and commercial banking entities, so as to adapt to customers’globalized and comprehensive needs and provide integrated fi nancial services that cover the entire industrial chain.

China Forex: China"s launch of its crude oil futures contract is believed to have a strong impact on the commodities market and renminbi internationalization.In your opinion, how can banks seize the business opportunities created by the crude oil futures contract?

Liu: China has become a major importer and consumer of commodities.Its dependence on imports of strategic commodities continues to increase, and"China demand" is now a distinctive feature of the world commodities market. Thanks to China’s stable economic growth and the Belt and Road initiative, the renminbi is becoming a new alternative for world trade. In this context, we are seeing ever wider use of the renminbi in the commodities sector.

China is also a major commodities market in the Asia-Paci fi c region and even in the world. With the growing trade volume of physical commodities, there is an urgent need to establish a fair and effective futures market which can accurately re fl ect the relationship between supply and demand and serve the functions of price discovery and price risk management. For the sake of connecting the domestic and overseas markets, the Shanghai Free Trade Area has conducted trials of innovative fi nancial products, such as a separate accounting systems for free trade accounts and developing open factor markets. This provides a favorable fi nancial environment for global investors participating in Shanghai crude oil futures trading.

Bank of China has attached great importance to the launch of the Shanghai crude oil futures contract, and has established a strategic partnership with the Shanghai International Energy Exchange. We will fully leverage BOC group"s advantage of comprehensive fi nancial services by providing traders with an integrated service program that includes account management, fund settlement, futures margin depository service, custody service, and wealth management. When our customers are trading crude oil futures, we will satisfy their needs for services such as fund settlement, clearing, fi nancing, currency exchange,hedging, and risk management.

China Forex: Chinese enterprises are "going global,"and there is a growing demand for banks’ global supply chain fi nance services. What innovations has Bank of China introduced in the supply chain fi nance area?

Liu: Chinese enterprises are responding to the government’s call to "go global" and the demand for trade fi nancing services is increasing. Bank of China has leveraged its advantages in trade fi nance, and actively explored solutions for the global supply chain. For Chinese enterprises that have competitive advantages and have taken initiatives to go global, we have cooperated with insurance companies and other fi nancial institutions to design a series of comprehensive supply chain fi nance solutions including Rongxinda (ECA-backed fi nancing) and two-factor export factoring. In so doing we have tailored the services to customers’ needs for risk mitigation, fi nancing and A/R management. At the same time, for Chinese suppliers of overseas companies making purchases from China, we offer products like purchase order fi nancing, export invoice discounting and Rongxinda, helping make their dream of "going global" come true.

Bank of China places considerable emphasis on the use of technology to build a platform to support global supply chain fi nance. By the third quarter of 2018, the bank will have launched its "overseas supply chain fi nance system" at key overseas branches, which will help these overseas branches improve their supply chain fi nance services, especially online services.

China Forex: Controlling risks is now a focus in the fi nancial sector. In your opinion, how can a balance be achieved between risk and opportunity in trade fi nance business?

Liu: Essentially, banking is all about risk. Risk management is of paramount importance to banks. Maintaining a balance between risk management and business growth is an eternal challenge facing the banking industry. Currently fi nancial risks are looming. Controlling fi nancial risks has been frequently mentioned in important conferences such as the Central Economic Work Conference and the National Financial Work Conference, which implies the urgency and seriousness of the situation.China"s top leaders have paid attention to this issue and demanded stricter fi nancial regulation by various levels of regulatory authorities.

Risks are also mounting in the trade fi nance sector of the banking industry as the economy slows down. Bank of China has sought to balance business growth with risk management. As I see it, the essence of trade fi nance is serving the real economy.In order to achieve a balance between risk management and business growth in the trade fi nance sector, banks must grasp that essential message. Banks need to build an all-round risk management system covering credit risk, operational risk and compliance risk. They need to enhance risk awareness.Banks should act on the requirements of "supply-side structural reform" and"cutting overcapacity, reducing excess inventory, deleveraging, lowering costs and strengthening areas of weakness." They need to support national strategies such as the Belt and Road Initiative, the development of the Xiong"an New Area, the coordinated development of the Beijing-Tianjin-Hebei region, the development of the Yangtze Economic Belt, the development of free trade zones and renminbi internationalization.Banks should enable advancement through technology and drive development through innovation by promoting product innovation as well as tapping into opportunities in newly emerged types of business such as the "foreign trade comprehensive service platform," the "cross-border e-commerce platform" and third-party payment services.At the same time, risk management should also adapt to situational changes, operation transformation, regulatory requirements and development trends so as to achieve scienti fi c and effective management and safeguard business development.