As I prepare my keynote speech for the sixth China Supply Chain Innovation Summit in Shenzhen this month, I mull over some of the defining trends that are shaping the country’s SCF market – making it such a dynamic, exciting and yet very different space to operate in compared to Europe or the US.
It seems to me that it is often the challenges the market faces that has sparked China’s numerous innovations. For instance, it is notoriously difficult to find detailed publicly available financial information on Chinese companies – particularly the smaller entities – on which to base an assessment of creditworthiness. This is a hurdle for any provider looking to lend money or set up a supplier finance programme in the country.
And yet the market is finding a way around this through the collection of ‘social ratings’ data – information that many argue is more reliable and up-to-date than traditional sources on which to base a credit decision. The use of non-traditional financing methods has flourished in China in recent years, with a plethora of peer-to-peer online lending platforms and online banks providing funding – often for those previously excluded from the traditional banking system.
The use of ‘social rating’ data is building on the internet-based lending trend, with data being gathered from the online payment behaviour of citizens and companies in the country. Information on where you book your holidays, how often you use a taxi service or whether you are a frequent late bill payer could all give clues to your creditworthiness. Much of this data is held with large payment companies such as WeChat and Alipay, with many in China making purchases via digital e-wallets and e-payment solutions provided by these companies.
The Chinese government first announced its plans in 2014 to have a fully operational social rating system by 2020 which records the online payment and social behaviour of every single person. Individuals would be graded highly for ‘good’ activity and penalized or marked down for ‘negative’ activity. A penchant for online gaming or even playing loud music on a train could reflect badly on your social rating.
Currently, some social rating systems are being trialled by regional governments and a handful of private internet companies have been allowed to use voluntarily-given personal data to base lending decisions on. For example, Sesame Credit, operated by Ant Financial and owned by the Alibaba group, is using data from Alipay to generate credit scores based on consumers’ online shopping habits. I recall how colleagues I know in China tell me they would avoid at all costs cancelling a taxi via their ride-sharing app at the last minute due to concerns on how that might negatively affect their social rating.
This government-backed endeavour to create a nationwide database of personal online data is not something that will sit comfortably with everyone in other parts of the world, but many argue that it can build up a much more accurate picture of a person or company’s financial viability. How it will be applied in supply chain finance platforms will definitely be something to watch.
China’s market has also become defined by a dynamic fintech scene, with many new firms entering the SCF space, all vying for a share of the market. Just last December, China Lending Corporation – a non-bank direct lender serving micro, small and medium-sized enterprises – said it was to offer SCF products.
As the domestic market becomes more crowded, I see more companies and platforms looking beyond the country’s borders to other Asian countries this year, setting up SCF programmes to support foreign suppliers providing goods for Chinese firms.
This theme of cross-border expansion will be further explored with an anticipated increase in collaborations between Chinese companies and European and American firms in 2019. A number of new alliances are expected to be signed this year. Already this February, Standard Chartered signed a memorandum of understanding with Chinese fintech Linklogis to work together on new opportunities in the supply chain finance space.
The Chinese market still, however, differs from its European and American counterparts – in part due to the continued dominance of their large non-bank conglomerates such as online retailers JD.com and Alibaba that provide SCF via their financing arms.
Yet, as was the case in Europe decades ago as outlined in last August’s column, there will likely be a time when these large conglomerates start to separate their financing entity, possibly even selling it to a bank or financial institution.
In that same column, I called out some of the poor behaviour of some Chinese corporates, where the buyers have pushed out their payment terms to extreme lengths, and then made money from financing their smaller suppliers. Professor Song Hua of the Business School of Renmin University of China often refers to these companies at conferences as “supply chain finance hooligans”.
It is likely we will see moves by the Chinese government in 2019 to tackle such behaviour, at least among state-owned companies, introducing guidelines – rather than legislation – to cap payment terms.
The Chinese market is clearly evolving fast, developing some distinctly Chinese traits while also looking at international opportunities. Many of these themes will provide a fruitful starting point for conversations in Shenzhen this month.