The Outlook for China's Trade Finance Development

China's trade finance business has made significant strides in recent years，resulting in a major contribution to global trade. However，trade finance practitioners are facing a new and complex mix of challenges amid a slowing economy，tougher regulatory requirements，trade protectionism and a growing pushback against globalization.

From 1953 to 1993，Bank of China was designated as the state's specialized foreign exchange bank，exclusively handling the nation's settlement and financing of foreign trade. Since the reform of foreign exchange management system in 1994，all commercial banks with a foreign exchange business license have been permitted to conduct foreign trade finance business.

However，according to statistics collected by the International Chamber of Commerce China，even though many newly established local municipal and rural banks have begun trade finance operations，the business has largely been concentrated in state-owned commercial banks，policy banks and medium or large shareholding commercial banks.

Trade banks account settlement transactions on about 70% of the country's global trade in goods，and these banks have been used as samples for data analysis in this study.

In China，the trade finance business covers a wide range of products and services，including trade settlement (or payment) products (LCs，documentary collection and cross-border remittances)，trade-related financing products，and bank guarantee/standby LCs among others.

Unlike in the West where banks typically do not include cross-border remittances as trade settlement products，trade finance departments in most banks in China are responsible for all of the abovementioned trade finance businesses and supply chain finance. According to a survey covering 62 banks，trade finance departments in 58 banks manage international remittance business in addition to LCs，documentary collection，guarantee/standby LCs and trade-related finance. In a handful of banks，the trade department manages international trade transactions exclusively.

Recently，in order to provide comprehensive and seamless financial services to their clients，more banks have been considering organizational reform from traditional trade department to transaction banking by integrating their transaction-related financial sectors.

Fintech

With the rapid development of e-commerce in China，banks are employing an array of measures to meet customer demand，comply with internal control requirements and compete with e-commerce providers. These measures include trade finance-related digitization and fintech research and practice，including eUCP (uniform customs and practices)，eURC (a supplement to the Uniform Rules for Collections for Electronic Presentation)，e-supply chain finance，e-guarantees，and blockchain domestic LCs，factoring and forfeiting.

Trade Settlement Trends

Major trade banks in China established trade processing centers about a decade ago，and the scope of business has varied. For example，some banks centralize the import-related payment procedures and bank guarantee/standby letters of credit，while others centralize all trade finance products.

Prior to 1994，LCs were the dominant payment method in international trade. However，with the rapid development of China as a trading power，cross-border remittances have been on the rise，accounting for 80.27% of payments in value terms between 2015 and 2017. LCs were 15.06%，a decrease from 18.55% in 2014，though there was a modest upturn in 2015. The data also reveal the usage of LCs generally rises in times of global economic slowdown.

However，the percentage varies in terms of payment methods in different part of the country. For example，in 2017，in one developed province where importers and exporters are generally major corporations，the average percentage of remittances reached 90.52% of total transaction value，while LCs accounted for only 6.81%. In the same province，one city with a high concentration of original equipment manufacturers recorded only 3.81% of its global transactions using LCs，while remittances took an overwhelming 93.88% share.

It can be seen that in export trade transactions，inward remittances have increased by about 1 percentage point per year as a proportion of total cross-border payments since 2015，with an average percentage of about 46.43%，while the average percentage of export LCs was 4.32% and export documentary collection was 1.5%.

Unlike export trade transactions，there is a different picture for import payments. Outward remittances were 33.84% of all transactions，12.59 percentage points below the figure for inward remittances. The average percentage of import LCs was 10.74%，6.42 percentage points higher than export LCs. Import collection was 3.17%，1.67 percentage points higher than that of export collection.

Key Reasons for Payment Differences

The basic reasons for the difference between import and export trade transactions when using remittance as a payment method may reflect the following factors:

China is one of the largest members in the global supply chain，but the bargaining power of exporters (especially small and medium enterprises) with big overseas buyers is comparatively weak. Buyers are usually reluctant to use LCs due to the higher costs and complicated procedures. Remittances，however，offer greater convenience and cut costs.

Since China launched its reform and opening policy in 1978，major exporters have established long term relationships with their counterparties，and LCs have lost ground as the preferred vehicle for protection against credit risk. More and more exporters are using export credit insurance as the risk mediation measure against buyers' credit risks when using remittances.

LCs are not popular with large exporters when trading with buyers of good credit standing due to their complicated procedures，heavy paperwork and prolonged time for the receipt of accounts receivable. Small and medium size exporters tend to use remittances much more frequently as well. On one hand，SME bargaining power is weak，as stated above. On the other hand，many SMEs are not familiar with LCs and do not treat them as a safe payment method because of frequent refusals.

The difference in the use of import LCs and export LCs may be related to the fact that China is one of the largest commodity merchandise importing countries. LCs are commonly used in commodity trade transactions due to the special procedures and traditional trade finance structures.

Two Sides of the Coin

According to a rough estimate from several banks，there is a big difference between the refusal rate under export LCs (about 30%) and import LCs (about 1%).

There are at least two reasons for the low rate of import LC refusals. For one，the Supreme People's Court promulgated the Provisions of the Supreme People's Court on Some Issues in the Adjudication of Letter of