Bank of China Eyes Trade Finance Boost from Economic Upgrade
Bank of China has long been known for its trade finance 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 finance sector in an exclusive interview with China Forex. She suggests that in order to achieve steady growth in trade finance，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 finance，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 finance business，and what is the future direction of this business?
Liu: In the trade finance sector，Bank of China has actively implemented national strategies with a focus on serving the real economy. It has made significant strides in developing its business while controlling risk. In 2017，the non-interest income from trade finance increased considerably and the bank was ranked first nationally in terms of its share of international trade and payments as well as cross-border renminbi transactions. Trade financing in renminbi and foreign currencies climbed steadily and the bank made good progress in expanding its free trade zone business and commodity financing business.
The bank showed good results as a main channel for China's foreign trade and renminbi cross-border flows. 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 efficiency of its payment services. The bank addressed difficulties of small and medium sized enterprises in accessing financing by providing "1+N" and "N+1" models for supply chain financing 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 finance 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 ¨C 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 financing business.
Product innovation has been another important area. In the trade finance 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 "cross-border e-commerce" and "foreign trade comprehensive service platforms." It also pushed ahead with research and development on comprehensive financial solutions in a bid to diversify trade finance products and strengthen market leadership.
The bank has also applied fintech 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 financial risks. It adhered to the principle of "examining risks first" in anti-money laundering efforts and held firmly to its compliance requirements. It conscientiously met regulatory requirements，took initiatives to enhance risk management capabilities，intensified risk control efforts for its key customers，key products，key regions and key industries，and expedited the disposal of NPLs. It held firm on its bottom line of "no systemic financial risks" and continued to improve internal controls for the trade finance business.
As to the future direction of trade finance，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，short-term financing，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 profitable business. The declining demand for investment in fixed assets and the liberalization of interest rates both contributed to a fall in the profitability 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 definition of transaction banking is stated as "a one-stop comprehensive financial 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 efficiency of fund operation."
Generally，there are three patterns for setting up a transaction banking department within a bank ¡ª and these are function-oriented，customer-oriented and product-oriented operations. Although the business scope of transaction banking differs significantly between banks due to different business focuses and client structures，all banks provide such services as account management，deposits，payment，trade finance，supply chain finance，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 finance in commodities. How significant is the commodities business to the bank in terms of trade financing?
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 significance 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 financing and complementary financial 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 financing 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 financing will encourage innovation in the banking sector. First，the patterns of commodity trade are complex; different industries have different