RegionsChinaChina’s Path to Trade Finance Automation

China's Path to Trade Finance Automation

In May 2008, Surecomp implemented its trade finance back office system and corporate front-end system at a major Chinese financial institution.
However, some complications have arisen owing to the way trade finance business is conducted in China, at both its mid-tier and mega-banks.

Trade Finance Business Models and Complexities

The remittance business in China is vast and, in many banks, remittances are sent and received by the trade finance systems due to the common interfaces required and the common reporting functions. This contrasts sharply with European and US practices, where banks tend to use specialised remittance systems.

Related to this is the fact that, in order to open an account in China, (at least as a foreigner), hardly any information about the client is required. It is possible to open an account at one of the Big Four banks in less than 15 minutes. Customers only have to present their passport and provide a mobile phone number – not even an address. It is possible immediately to receive a debit card for withdrawing cash at ATMs and make EFTPOS purchases as well as a USB enabling users to access their account over the Internet. The card number identifies the customer to the bank. However, if a remittance is received, the only details quoted about the beneficiary are the name and the card number. This can therefore create enormous problems for the banks in identifying the client, making contact with them and receiving the client’s instructions. In many cases the client cannot be identified correctly and, as a result, the funds are returned to the remitting bank.

In terms of the actual trade business carried out in China, at least by the major government owned banks, it tends to be quite traditional: letters of credit (LCs), collections and guarantees, but the transaction volumes at these banks can be huge. For example, in most of Surecomp’s major global implementations of IMEX, the system normally has between 100-1000 users. At a major implementation in China, there are more than 6000 users.

The mid-tier banks find it hard to compete with the major players in terms of volume-based efficiency, but have found other ways to compete by creating more inventive products. These include import and export refinancing and export LC forfaiting, where the transaction finance is provided by another bank, with the operating bank simply making its profit on interest rate differential.

Another major difference between Western and Chinese usage of trade finance systems is the requirement by some Chinese banks to use the trade system to carry out foreign exchange trading, including spot buying, selling and cross- and forward buying and selling. In Western banks, these trades would normally be carried out using the bank’s treasury system, but in some Chinese banks the treasury systems can only handle financial institution trades and not corporate customer business.

In most countries which have foreign exchange controls, there are quite stringent reporting requirements. However, no country, in my experience, has such strict reporting regulations as those imposed in China by State Administration of Foreign Exchange (SAFE). SAFE requires that by noon each day full and detailed reports are submitted by each branch related to all the foreign exchange transactions carried out the previous day. Seven different report formats are required. Not only do these reports have to be submitted in electronic format, each report must also be printed on special forms by each branch and printed on dedicated printers. The rules governing the reporting requirements are so complex that banks themselves have difficulty understanding them, and this results in the need to manually review all non-transactions to ensure that they do not need to be reported. As the volumes are enormous, a great deal of manpower is required for this task, irrespective of the efficiency of the systems which provide the raw data.

A final feature that applies specifically to Chinese banks is the use of SWIFT to send and receive messages in Chinese. As SWIFT does not support the Chinese character set, each Chinese character needs to be automatically converted to a four-digit code, which is then decrypted by the receiving bank and displayed in Chinese. Not every trade system can support such requirements.

Trade Finance System Implementation Issues

There are major differences between implementing trade finance systems in China compared with the West or even some other Asian countries. Surecomp recently implemented its IMEX system in the Hong Kong and Macau branches of a major Chinese bank. As a result of the project management skills of the client, the expert business knowledge of the client’s team and the hard work and long hours put in by both the client’s and Surecomp’s team, the system was implemented in both countries in less than seven months. This included around 300 personnel-days of development, including all required interfaces and the migration of all the client’s transactions from the bank’s old system.

Of course, Hong Kong could be considered as a special case. It has vast business experience accumulated over many years of exposure to the international market. The Hong Kong banks are able to recruit the best IT, management and trade professionals. Most of these people have been involved in previous implementations, some of them at several different banks. Mainland China contrasts starkly with this scenario. Most of the systems in use at Chinese banks, from core to trade systems, are home-grown and have been developed over many years. Chinese banks have little experience in implementing vendor systems, especially international systems from non-Chinese vendors.

However, the recent emergence of China as a global economic super-power has been accompanied by a determination by the banks to equal or exceed the capabilities of their Western counterparts. This has led to a spate of parallel implementations of international systems, which have to interface with each other and whose functionality is to a large extent determined by the functionality of other systems which are being implemented simultaneously.

This factor, combined with a lack of highly experienced system integration managers, can lead to serious complications when trying to implement a trade system. While Hong Kong clients can usually decide on their required operation mode and interfacing needs within a few weeks, the same process in a Chinese bank can take many months and may change several times along the way due to changes being made in other systems.

While China is now a highly advanced country in all respects, and while most staff tend to be comparatively quite young, traditional ways of thinking can still be detected. For example, the neo-Confucian doctrine of the ‘golden mean’ (or ‘middle way’) is constantly felt in the desire to compromise wherever possible but to stand up for what is believed to be correct. However, this mentality can also result in a lack of ability to make quick decisions, a key factor in any system implementation.

Having said that, Chinese banking staff are extremely hard-working (many working 12 hour days, six days a week), and their level of English has improved dramatically, especially over the last five years. When Surecomp first started to market its systems in China, one of the key requirements was that the system interfaces must be available in Chinese. This is no longer a requirement for our back office system, as the banks are forcing their system users to become natural English system users (of course, corporate customer access systems need to support English as well as Simplified and Traditional Chinese as per the user’s preference).

Another key common implementation factor is the desire for banks to centralise their trade processing. In the past, trade systems tended to be implemented at the branch level with little or no communication between the branches. That, too, has changed. Different banks have implemented different models including super hubs, Tier 1 (Main Branch), Tier 2 (Sub-Branch) and Tier 3 (agency) branch levels, with different view, access and processing rights depending on the user’s level in the hierarchy. Many Chinese banks have integrated imaging and workflow as part of their trade process in order to obtain the most streamlined results, putting them on an equal footing with many Western and US banks.

In conclusion, one may summarise that, while the implementation of a trade system in China can be a highly complicated and lengthy experience, once in production, these banks obtain a rapid return on investment and can leverage their investments to provide the highest possible levels of service and processing capabilities.

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