Supply chain finance becomes a hot topic of new policies

2019-11-01 17:01:00

Understanding China Guangzhou Conference held recently draw attention to the global supply chain security.
Long Yongtu, Chariman of Centre for China and Globalization and Chief Negotiator of China's WTO accession, pointed out on the conference that trade protectionism and unilateralism destroy the global industrial chain. It is important to safeguard its safety, innovativity and integrity. He suggested that China supported leading companies to better guide the industry they belong to and back the innovative growth of SMEs. In this way, global industrial chain and industry system would further grow and economic globalization leap onto a higher level.

Long Yongtu, Chariman of Centre for China and Globalization and Chief Negotiator of China's WTO accession
During the economic downturn, Chinese economy as the engine of the world economy growth are slowing down as well. Supply chain finance, however, unexpectedly become a tailwind. Ever since the beginning of this year, core cities of the Greater Bay Area such as Guanghzou, Shenzhen and Zhuhai have rolled out policies on supply chain finance. Combined with policies of the same kind frequently issued from the central government and local governments in the past few years, supply chain finance has become the most talked about in policies. A group of corporations located in the Greater Bay Area rapidly ride the tailwind generated by new policies to step up their efforts in supply chain finance, and thus gained new development against the market slump.
"On the one hand, we step up our efforts in upstream mineral resources storage and exploitation. On the other hand, we integrate supply chain service and financial resources, improve supply chain financial service capability and devote ourselves in providing tens of thousands of SMEs in manufacturing sector with quality and secure supply chain service." said King Cheung, Founder and Chairman of the Board of Cedar Holdings in the conference.

King Cheung, Chairman of the Board of Cedar Holdings


New policies rolled out one after another

Statistics shows that the world's economic growth is slowing down. International Monetary Fund (IMF) downgraded its outlook for global economic growth rate for 2019 and 2020 in a report published on 15 October. The global growth is downgraded by 3.0% for 2019, which is the lowest level since the financial crisis in 2008. The outlook for 2020 also fell to 3.4%.
China's economy has slowed down along with the global economic downturn. On 18 October, National Bureau of Statistics published economic statistics for the first three quarters which shows that the GDP for this period grew by 6.2% YOY. Specifically, the growth in the first quarter was 6.4%, the second quarter 6.2%, and the third quarter 6.0%.
The pressure for SMEs is pilling up as well. At the end of 2018, the number of SMEs was down 6494, which was the first time in history that a negative growth appeared. Chinese SMEs contributed greatly to GDP and tax revenues, with over above 50% to tax revenues, 60% to GDP, more than 70% to technology innovation and over 80% to employment.
To help with a huge proportion of SMEs, micro companies and private enterprises, national policies on supply chain finance were rolled out one after another recently to overcome their difficulties and high cost of financing as well as the last-mile problem.
Looking back at the past two year, policies about supply chain finance came out at short intervals. In October 2017, the State Council issued the first master plan about the supply chain - Guiding Opinions of the State Council on Actively Promoting Supply Chain Innovation and Application. According to this document, by 2020, China is expected to have a bunch of new technology and patterns specifically suited for Chinese supply chain development. Smart supply chain system that covers Chinese key industry should be in place. What's more, China plans to foster about 100 global supply chain leading companies. The supply chain of key sectors is expected to compete with top players in the world and China become a hub of global supply chain innovation and application.
In response to the central policies, governments at provicial and municipal levels followed suit to roll out policies on supply chain finance. In 2018, for example, Guangdong, Zhejiang and Jiangsu province published Implementation Opinions on Actively Promoting Supply Chain Innovation and Application, which adapt to their local conditions.
It is worth noting that since 2019, core cities of the Greater Bay Area have regarded promoting the development of supply chain finance as an important means to further supply chain industry growth. Key cities and towns of the Greater Bay Area like Guangzhou, Shenzhen and Hengqin acted on the master plan and rolled out supply chain finance policies. On 20 September 2019, Guangzhou Municipal Local Financial Supervision and Administration printed and published Implementation Opinions on Guangzhou Promoting Supply Chain Finance Development. This is to encourage innovative development of supply chain finance and distribute more credit resource to SMEs upon upstream and downstream of core enterprises of the supply chain. 


Enterprises focus on supply chain finance

From a global perspective, supply chain has become an important measurement of national comprehensive strength of a country. Countries and regions like Europe, the US and Japan have already made global supply chain competition part of their national macro strategies. Supply chain finance plays a more and more important role in Chinese modern economy system.
As is known to all, Chinese enterprises has been at a disadvantage in terms of supply chain finance compared to foreign companies.
Judging from statistics about financing, SMEs loans make up only 24.67% of total loans handed out by the banks. Over 40% of SMEs have financing difficulties with a cost of up to 1.5 times to twice of that of large corporations. The long time it takes for loan approval combined with difficulties and high costs for financing make flexible operation for these companies impossible. Over 60% of sub-suppliers and suppliers are not granted bank loans. They have huge pressure of getting capital and the turnover is slow.
Take accounts receivable financing as an example, in 2018 alone, funding in need exceeded RMB 13 trillion, but only RMB 1 trillion of funding was given, mainly from large banks to upstream suppliers of key megacorporations. In contrast, SMEs on the tail of the supply chain still suffer from not getting the money they need with almost RMB 12 trillion.
To solve this problem, China has been doubling down on supply chain finance development. The government give its support mainly to a core corporation on the supply chain. Loans are granted to corporations on the whole industrial chain through the management of capital flow and logistics of this core corporation. In doing so, uncontrollable risks of a single company are converted into controllable risks of all the companies on the supply chain. As risk management pattern is changed, SMEs can have easier access to financing at a reasonable cost through low barrier.
Industry insiders estimate that by 2020, supply chain financing will surpass RMB 27 trillion. A group of corporations in the Greater Bay Area have discovered huge potential of the supply chain finance development, so they caught the opportunities and started their presence in this area.
Take Cedar Holdings as an example, as a Guangzhou homegrown private enterprise listed on the Fortune Global 500, Cedar Holdings has become a Chinese commodities leader and established apparent advantages in the upstream and downstream of the supply chain during its overseas development. Since 2018, while involving itself in the upstream mineral resources business, Cedar has rapidly acquired financial resources to make up for its weaknesses. In March this year, Cedar Holdings has managed to increase its share capital and reserve in Dalian Financial Assets Exchange. On 22 April this year, shareholder of Jiangxi International Trust Investment. On 25 June, the latter changed its name to Cedar International Trust. On 23 August, Cedar International Trust launced its first trust plan Xinlian No. 1, after changing its name. This initiated the company's transformation towards specialized finance and switch to supply chain finance. In August, Cedar International Trust issued two supply chain finance product - Changqing No. 12 and Changqing No. 13.
Another supply chain company in Greater Bay Area is called Eternal Asia. It is the first supply chain public company. It focuses on financial business in order to provide value-added services. It has gone from the third-party logistics pattern development to the fourth logistics pattern that delivers services like logistics planning, consulting, logistics information system and supply chain management. In 2017, Eternal Asia proposed integrating supply chain plus the Internet, supply chain finance services and technology, evolving from a platform like enterprise to an ecology-based corporation.
With increasing policy supports, the Greater Bay Area will see more and more corporations jump into the supply chain finance development in the coming days.
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