Friday, November 15, 2013, 07:50
Platform to aid trade financing in FTZ
By Wei Tian in Shanghai

The People’s Bank of China, the nation’s central bank, is considering establishing a draft trading platform within the China (Shanghai) Pilot Free Trade Zone to promote trade financing, said an expert close to the matter.

Pan Yingli, a professor at Antai College of Economics and Management at Shanghai Jiaotong University, and an independent director with China Merchants Bank Co Ltd, said such a platform, though still in its formative stages, will be key in developing a yuan-denominated financial market system.

“It will promote the internationalization of renminbi and Shanghai’s role as an international financial center,” said Pan, who added that the US dollar benefited from a similar trading platform in New York when becoming a global currency.

Establishing the draft trading platform is expected to give a boost to the draft market, which is underdeveloped in the country due to the current absence of an integrated platform.

The move also is expected to promote renminbi financing for overseas trade as well as trade financing tools such as letters of credit for foreign and Chinese banks.

Trade financing refers to short-term financing or credit convenience related to trade settlement that banks provide to importers or exporters.

Trade financing frequently occurs using letters of credit and documentary bills.

In China, raising money with commercial paper is gaining popularity, but the market is still quite limited.

Ding Jianping, professor at the Shanghai Institute of International Finance Center at Shanghai University of Finance and Economics, said the establishment of a draft trading platform will help to lower financing costs to manufacturers in China.

“Although major banks have their own service of trade financing, there lacks an integrated platform,” Ding said.

“Once an integrated market is in place, it will result in a more efficient allocation of resources and lower the cost of financing for enterprises, which also is beneficial for banks because of scale economy.”

Bank of China Ltd is among those looking to provide trade financing services in the FTZ, The Wall Street Journal reported, citing Cheng Jun, general manager of the bank’s corporate banking unit.

Since the official launch of the Shanghai FTZ at the end of September, a dozen banks, including the “Big Four” State-owned commercial ones — Bank of China, Agricultural Bank of China Ltd, China Construction Bank Corp, and Industrial and Commercial Bank of China Ltd — and a handful of foreign banks have registered branches within the 28 sq km area to tap into opportunities vested in financial reforms.

Lian Ping, chief economist with the Bank of Communications Ltd, said the Chinese bank’s FTZ branch will function as an overseas branch, and thus enjoy more latitude in borrowing and lending as it would not be bound by restrictions such as a 75 percent loan-to-deposit ratio and 20 percent reserve requirement ratio.