An inquiry on the characteristics of international trade financing and the inevitability of its choice

The concept of international trade finance

In short, international trade finance refers to the financing provided by banks to foreign trade enterprises in relation to international trade settlement. Compared with traditional production-based financing, international trade finance has the characteristics of short financing term, low financing cost, close integration with international trade settlement means, diverse and flexible financing methods, management by drawing on the experience of the securities market, self-repayment, low access threshold, relatively simple approval process and low financing risks.

Principles of trade financing for Chinese enterprises

  1. The principle of minimum financing cost.

According to Western financial theory, when the capital market operates effectively, the value of the project for the shareholders of the company engaged in the investment does not depend on the actual method and strategy used to finance the project. Different financing methods do not bring about differences in the cost of financing, and the risk-adjusted cost of capital from different sources remains essentially the same. In fact, however, the international capital market is not a perfect capital market. Extensive and deep economic interventions by governments have caused the unified international capital market to be subdivided into numerous differentiated markets, and the cost of capital from different sources does not differ only by risk. This provides a good opportunity for companies to minimize the cost of global financing. In order to achieve the lowest cost of financing, enterprises mainly through the avoidance or reduction of taxes, as far as possible to use a variety of subsidized loans and strive for local credit quota and other strategic principles.

  2. The principle of financing risk minimization.

The modern asset selection theory in international investment theory introduces the risk factor, from the future return has uncertainty, the return and risk of various assets are weighed and compared, in order to reduce the risk and obtain the maximum return through the most appropriate combination of the purchase of various financial assets. Since all assets have duality of return and risk, and different assets have different combinations of expected return and risk, investors from various countries always tend to diversify their funds into a variety of assets in many countries to avoid risk, because diversification will help spread the risk. Similarly, for international trade financiers, one can also explain the motivation from the perspective of diversification of financing risks. Firms broaden their financing options on an international scale without relying too much on a single or a few financial markets. In this way, the overall risk of corporate finance can be reduced, but also through financing activities, and financial institutions around the world to establish links to enhance financial and economic information sources.

  3、The principle of combining financing and trade methods.

Different trade methods have their own characteristics, and thus their requirements for trade settlement and financing are different. Take special trade as an example, special trade is a flexible and new type of trade in the process of development of modern international trade. It mainly includes countertrade, compensatory trade, processing trade, bookkeeping trade, etc.. The emergence and development of these forms of trade have added new content to international economic cooperation. Especially for developing countries, the vigorous development of these special trade has had a significant impact on improving the economic situation of the country, on promoting capital export and technology transfer from developed countries to developing countries, and on the adjustment of the industrial structure within developing countries, thus promoting the development of the world economy.

Problems in the use of trade finance by foreign trade enterprises

  1、The threshold of access to international trade financing for SMEs is too high

Although the banks have relaxed the access threshold of trade financing business, they have not treated the trade financing of SMEs differently from large enterprises, which has caused the actual access threshold of trade financing for SMEs to remain high. For example, for packaged loans, in addition to requiring enterprises to have an original letter of credit issued by a bank with a high credit rating, they also need to confirm a valid guarantee (guarantee or collateral), which is managed entirely as if it were a working capital loan. This does not reflect the advantages of its trade finance products.

  2. Lack of standards for trade finance approval

At present, commercial banks equate the business approval of trade finance with the approval of general loan business, ignoring the characteristics of trade finance business and lacking a set of fast and efficient approval methods to meet its characteristics. The approval time is often longer than the trade financing period. At present, although commercial banks have implemented a unified approval of credit in foreign currency, but trade finance approval in accordance with the RMB credit approval mode of thinking.

  3, international trade financing in a single form

In terms of the type of international trade financing, the domestic basically is still dominated by the traditional financing, that is, the combination of letter of credit settlement and financing, less variety, and single function. Banks often can only do some business variants of the shallow innovation, can not adapt to the international economic and financial development trend of deep-seated changes, the commercial banks of trade finance is basically the same form of simple trade loans, packaged loans, bills discount, etc., the emerging international forfaiting, warehouse receipt financing, export commercial invoice financing, etc. are few banks to start, never large-scale development, the business is extremely limited. The business volume is extremely limited, and it is difficult to meet the needs of those SMEs actively participating in internationalization.

Countermeasures and Suggestions

  1、Establish a comprehensive and accurate credit system

  In developed countries, the relevant departments will conduct perfect, timely, accurate and transparent credit assessment of registered enterprises. If an enterprise is in the “low credit” stage in the evaluation system, a warning will be issued and published regularly. China’s export enterprises should strengthen the cooperation with financial institutions and use the business information and professional credit assessment system of financial institutions to improve the construction of their own credit system and reduce the bad debt rate of export payments.

  2. Play the role of CITIC Insurance

  Import and export banks need to focus on policy export credit financing, while the role of CITIC insurance needs to be further strengthened for most small and medium-sized trade financing. In this regard, we can refer to advanced foreign experience, centering on credit insurance and using its guarantee to leverage commercial banks’ funds to provide trade financing services for the majority of SMEs. In this regard, we can refer to the advanced foreign experience to provide trade financing services for SMEs with credit insurance as the center, and leverage the funds of commercial banks with its guarantee. The Credit Insurance Department of Henan Province has signed an agreement with all commercial banks in Henan Province to provide convenient and fast trade financing services for foreign trade enterprises in Henan Province, with Credit Insurance as the final guarantee. This innovation has opened up new ideas for the development of credit insurance.

  3、Continuously improve the quality of business personnel

  First of all, banks should train their business personnel on international trade, international finance, law and other related knowledge, so that they can understand the bank’s trade financing products and the characteristics of various products; secondly, business personnel should strengthen their risk awareness. In the usual work, we should pay attention to sum up the lessons learned, and constantly accumulate experience, especially to be proficient in international trade knowledge and transport insurance business, pay close attention to the dynamics of the international trade market, understand the changes in the commodity market, cultivate insight into the international trade market, and enhance the ability to identify potential risks.