Innovative trade
Creative use of blockchain in China may strengthen global supply chains
Creative use of blockchain tech may bolster global supply chain
As consensus is fast emerging that supply chains hold the key to preempting the health crisis sparked by COVID-19 from turning into a global food and humanitarian crisis, China is innovating financial technologies, or fintech, to strengthen its small and mid-sized enterprises involved in cross-border trade.
For, such SMEs form the backbone of global supply chains. But travel curbs, lockdowns and border closures relating to the pandemic caused disruptions, sparked concerns about cross-border finance and credit crunch, and led to calls for faster, reliable digital approaches.
Against this background, the State Administration of Foreign Exchange, the country’s foreign exchange regulator, is improvising a blockchain platform to facilitate faster cross-border payments and trade finance.
The platform will also provide other services to simplify and expedite the trade financing process for the SMEs concerned, said Zhang Tiecheng, head of SAFE’s technology department.
Xuan Changneng, deputy administrator of SAFE, said 87 Chinese enterprises have received over $200 million in loans through a pilot cross-border blockchain financing platform since the Jan 24-Feb 2 Lunar New Year holiday.
For its pilot, SAFE chose Jiangsu, Zhejiang and Fujian provinces. Some 14 commercial banks joined the trial. Later, more than 170 commercial banks joined as well, providing supply chain financing of $13.91 billion to 2,276 enterprises. Among the credit recipients, more than 70 percent are trade SMEs, SAFE said.
For instance, Industrial Bank has offered $1.13 million to a local food company through the cross-border blockchain platform. More than 70 percent of the bank’s blockchain financing services are for SMEs.
Prior, another pilot cross-border blockchain financing platform was introduced in March 2019. It is the nation’s first and only such platform offered by the central government.
Given their often unrecognized importance, trade SMEs may feel such fintech help did not come a day sooner. According to a survey conducted by Ant Financial, e-commerce giant Alibaba’s financial arm, more than 70 percent of SMEs may be seriously affected by the pandemic’s fallout as they cannot resume production in time due to declining revenue caused by disrupted logistics.
Even Chinese exporters, especially SMEs, are under great pressure because of their reliance on international supply chains.
Amid this scenario, the potential of distributed ledger technology, or blockchain, has been broadly recognized by trade SMEs, financial intermediaries and regulators. Blockchain is reshaping the way individuals and businesses transfer, store, and maintain ownership records of goods and services.
Before blockchain’s emergence, SMEs involved in foreign trade relied on traditional financing. The practice bridged the gap between an exporter shipping a consignment of goods and an importer paying for it. Its notorious hallmarks were heavy documentation and long banking procedures.
But the pandemic-related disruptions, movement curbs, lockdowns and quarantine measures ensured that the old practice was not only impractical but potentially disastrous.
Moody’s Investors Service said in a report that sectors reliant on trade and free movement of people are most exposed to credit risks as the pandemic will slow economic growth.
Data indicated as much. China’s exports of goods contracted sharply in January and February, marking a trade deficit of $7.09 billion, the first aggregated trade deficit in eight years, according to the General Administration of Customs.
In response, the State Council, China’s Cabinet, met on March 10 and released a package of new measures to stabilize exports. A highlight was the emphasis on financial support to offset pandemic-related disruptions.
To prevent SME bankruptcies, maintaining streamlined cash flows using advanced digital financial tools is necessary, said Huang Yiping, deputy dean of the National School of Development and director of the Institute of Digital Finance at Peking University.
According to officials, a SAFE working group is engaged in expanding the pilot cross-border blockchain platform and mitigating associated risks, to facilitate crossborder financing for trade SMEs and reduce their financial difficulties.
Financial authorities in China will continue to develop new scenarios for the cross-border blockchain financing platform, providing convenience for cross-border settlements and financing of trade firms.
Thrust will be on increasing research of technology and application of cross-border blockchain platform. SAFE plans to release standards for application program interfaces, or APIs, establish datasharing channels between commercial banks and the cross-border blockchain platform, and introduce innovations to improve the data security system, said Zhang from SAFE.
“Blockchain technology could shake up cross-border payments and trade finance, by reducing the reliance on physical documentation and providing digital records of transactions, a method that can expedite access to finance for SMEs involved in foreign trade,” said Zhang.
The most conspicuous impact is that blockchain reduces use of physical paper, and simplifies the complex process of manual verification of documents at banks. The procedure of submitting applications for finance or credit will also be shortened, which can cut costs of trade enterprises, he said.
Henry Ma, chief information officer at Tencent-backed online lender WeBank, said that cross-border financial blockchain services can play a bigger role in helping SMEs improve the efficiency and convenience of getting export trade financing and other financing or credit support.
Hau Lee, a professor with the Stanford Graduate School of Business, wrote in a research report that “blockchain can provide detailed data on previous transactions, and thus provide some history to facilitate risk assessment by the financier”.
Blockchain technology can also address the problem of SMEs with suspect credentials or poor record obtaining bank loans using fake pledges. Lee expects use of blockchain to be widespread in trade finance by 2050.
Little wonder, some of the world’s major central banks, such as the US Federal Reserve, have established working groups to analyze financial innovations of blockchain for application in cross-border payments and trade finance.
In a speech, Lael Brainard, a former member of the Board of Governors of the Federal Reserve System, said that significantly faster processing and reduced costs relative to the long and opaque intermediation chains associated with current methods of correspondent banking, are promising potential benefits of the blockchain technology.
“Reducing intermediation steps in cross-border payments may help decrease time, costs, and counterparty risks and may materially diminish opacity, for instance, by enabling small businesses or households remitting payments across borders to see the associated transfer costs and processing times up front.”
To offset the impact of the pandemic on trade SMEs and to facilitate cross-border financing, China’s central bank and SAFE jointly announced a policy on March 12 to encourage SMEs to increase financing from overseas. The new policy increased the full-aperture-data macro prudential adjustment parameter of cross-border financing from 1 to 1.25, a measure to accelerate the production resumption amid the contagion.
Additional policies will be formulated to promote cross-border financing, as well as to prevent risks caused by cross-border capital fluctuations, to ensure financial security, said a SAFE spokesman.
Blockchain technology could shake up crossborder payments and trade finance, by reducing the reliance on physical documentation and providing digital records of transactions ...” Zhang Tiecheng, head of SAFE’s technology department