As Chinese and Taiwanese financial institutions look to increase cooperation, a mutual interest in lucrative cross-strait trade is creating new trade finance opportunities.
Earlier this summer, the Bank of China travelled to Taiwan on a road show promoting the Society for Worldwide Interbank Financial Telecommunication's (Swift) open account Trade Services Utility (TSU). While no cross-strait deal was reported during the trip, it signalled a step towards greater integration and simplified trade finance flows between the two countries.
"More than 50% of mainland-Taiwan trade settlement is conducted by the Bank of China," said Cheng Jun, director of global trade services in the Bank of China's corporate banking unit. "We believe that Taiwan will become more and more important in our trade finance business as mainland-Taiwan economic relations keeps moving forward."
Prior to last year's three links (mail, trade and transport) agreement between China and Taiwan, traded goods and payments between the two countries had to be routed through Hong Kong. While the actual process of issuing a letter of credit or processing an open account transaction was the same as between China and other parts of the world, the intermediate stop added unnecessary cost and time.
Last year, trade between China and Taiwan totalled $129.2 billion, making Taiwan China's sixth largest trading partner.
The Bank of China is pushing Swift's TSU in Taiwan to facilitate the continued growth of trade between the two countries. A direct connection between two banks through the utility eliminates paper processing, which reduces transaction costs and speeds up the payment process.
The TSU is a matching engine for banks to handle open account trade transactions. The utility is capable of matching certificate and insurance documents, invoices, purchase orders and bills of lading.
The utility is a critical piece of banking system infrastructure but is still largely just "infrastructure." One industry executive compared the actual adaptation and usage of the TSU to that of Swift's original FIN message (Swift's financial messaging format) in the 1970s and 1980s, the latter took more than a decade to become the industry's de facto messaging conduit and the TSU is today at the beginning of a similar lengthy acceptance curve. The executive said there is a lot of "opportunity" for TSU in banks' trade finance business in the future.
"The TSU alone is only a bank-to-bank service [and] banks need to build on their own open account services to meet their customers' needs," said Connie Leung, Asia-Pacific head of trade and supply chain markets at Swift.
Referring to the Bank of China's recent interbank agreement with the Bank of Tokyo Mitsubishi UFJ, she continued: "What a bilateral agreement basically says is that customers of Bank of China and Tokyo MUFJ can now do a complete end-to-end transaction through the TSU."
While not stating it directly, the bank's trip to Taiwan is understood to have been undertaken to promote direct connections between itself and Taiwanese financial institutions. Four Taiwanese banks have already signed up for the TSU, namely Chang Hwa Commercial Bank, Chinatrust, First Commercial Bank and Hua Nan Commercial Bank.
According to Swift, the Bank of China is the only mainland financial institution promoting TSU in Taiwan.
The Bank of China signed its interbank agreement with Bank of Tokyo-Mitsubishi UFJ in February. The Chinese bank also has a non-disclosure agreement regarding the exchange of customer information over the TSU with the Korea Exchange Bank.
The Bank of China first implemented the TSU in June 2007, initially at its Shanghai branch and later at its Jinan, Qingdao and Shenzhen branches. It was one of the first institutions in China to use the utility.
The Bank of China see's the TSU as the next step for banks' trade finance businesses. "The market share of traditional [trade] document services as a proportion of international settlement has fallen year by year," said Zhou Jinchan, a director at the Bank of China's corporate banking unit in Beijing. "This decline has been matched by a growing trend in the credit settlement market, whereby remittances are used to settle payments."
"In view of this, banks need to provide customers with new settlement channels tailored for market requirements," she concluded, referring to open account trade solutions.
According to Leung at Swift, the TSU is the "central engine for open account data".
China currently has the most TSU-connected banks of any country in the world. In addition to the Bank of China, other banks connected to the utility are Agricultural Bank of China, Bank of Communications, China Citic Bank, China Construction Bank, China Merchants Bank, China Minsheng Banking Corporation, Guangdong Development Bank, Hua Xia Bank, Industrial Bank and Industrial and Commercial Bank of China.