24 October 2016
Chinese banks can leverage their strengths and resources and provide one-stop financial services for firms involved in the so-called Belt and Road projects. Photo: CNSA
Chinese banks can leverage their strengths and resources and provide one-stop financial services for firms involved in the so-called Belt and Road projects. Photo: CNSA

What banks should do to ride China’s Belt and Road program

China’s “One Belt, One Road” initiative will bring an unprecedented opportunity for the nation’s commodity industry.

Commodities are closely linked with people’s livelihood, and serve as barometer of economic health. The Belt and Road initiative directly affects the infrastructure construction and trading sectors in China and countries along the routes.

It will boost commodity demand both at home and abroad and help absorb China’s excess capacity.

China is the world’s largest commodity consumer. The Belt and Road strategy will enhance the nation’s competitiveness and dominance in the commodity market, as well help the country gain a bigger say in determining global commodity prices.

The strategy will also bring historical opportunity for China’s commodity financing. The Belt and Road initiative covers 4.4 billion people or 63 percent of the world’s population, and US$21 trillion GDP or 29 percent of the world’s total.

Infrastructure construction will be a top priority, including roads, oil and gas pipelines, energy and ports facilities in nations along the routes, as well as transport network and logistics hubs at key points.

It’s estimated that as much as US$8 trillion is required to implement the Belt and Road strategy. Various banks are trying to figure out solutions that will cater to these projects.

While there are opportunities, the commodity financing business also faces some challenges. That is because a steel trading scandal in Shanghai and a commodity fraud at Qingdao port have already exerted heavy pressure on banks’ commodity business.

Both Chinese and foreign banks have tightened commodity financing in the wake of the scandals. Traditional commodity financing has failed to keep pace with the latest developments in the industry.

Given this situation, commercial banks should figure out new ways to meet clients’ changing needs.

It should be borne in mind that commodity companies are stepping up efforts to expanding their global presence, and that a growing number of firms have set up offshore units and ventured into upstream and downstream operations.

Traditional bank financing no longer matches the diverse financing demand. Banks should start to provide structured trade financing products, global cash management, debt financing, private equity, public-private partnership (PPP), etc.

Banks’ role is no longer confined to being capital providers. They are instead required to be total financial solutions providers that integrate resources in different areas. They should be able to offer tailor-made financial services.

In that process, Hong Kong has a key role to play. As the leading international financial hub in Asia, Hong Kong has advantages in areas such as legal system, tax laws, information flow and professional talents.

In recent years, the city has been vying to become a pricing centre for the global commodity market.

This presents many opportunities for banks, including those from the mainland.

Chinese banks can gain by leveraging their strengths and resources in the mainland and providing one-stop financial services for commodity firms and offering solutions for the Belt and Road program.

This article, published in the Hong Kong Economic Journal on Sept. 7, was contributed by Lin Zhihong, deputy chairman of the Chinese Financial Association of Hong Kong and the governor of Hengfeng Bank.

Translation by Julie Zhu

[Chinese version 中文版]

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