Considering the evolving nature of trade finance, it is plausible that in the near
future, traders in the Chongqing PFTZ may feel that trade credit and SCF would be
more suitable to support their trade when using the railway corridors.
5 The Possibility to Monetize Receivables
The car traders in Chongqing use the Chongqing-Xinjiang railway line for parallel
imports from Europe. The term “parallel imports” refer to completely built cars
imported from overseas markets via professional channels and are parallel to cars
imported via traditional channels. Cars imported through traditional channels are
sold at registered dealers of car manufacturers who provide sales, spare parts, service
and survey (referred to as 4S dealers). The parallel imported cars are up to 20%
cheaper than those imported through traditional channels. The parallel importers
have to show sound financials for securing license in China.
53 They buy cars from
exporters in Europe who are small dealers. After few years, once trust is established
between the traders, it is possible that the Chinese importers may request for open
account terms. The well-capitalized Chinese importers may be in a position to use
their own balance sheet to support the small car exporters. A number of strategies
have emerged in recent years to help traders, for example, leverage the importer’s
stronger financial position to help the exporter access low cost liquidity, so that the
exporter can then offer the importer extended payment terms. Some of these
strategies involve monetization of the importer’s trade accounts receivable. The
most common forms of trade receivables monetization include open account based
SCF and transferable instrument based SCF. Together, these two strategies are
generally referred to as reverse factoring, which is based on financial technology
to link importers, exporters, and financial institutions to improve cash flow, reduce
supply chain risk, and provide predictable return on investment for funders.
54
An open account based SCF relies on the sale of accounts receivable which
requires predictable laws and a proper filing system.
55 However, in China, selling
intangibles can be cumbersome and may expose the investor to additional legal risks,
such as fraud and insolvency. Also, the investor may be required to obtain lien
release from exporter’s lenders before the receivable can be sold. The existence of a
proper recording system for filing information about sale and purchase of receivables
is necessary as well. Therefore, a transferable instrument based receivables financing
programme using promissory notes or bills of exchange, governed under a chosen
53 HKTDC Research (2018) Chongqing: On Track for Europe via the Yuxinou Rail Route https://
hkmb.hktdc.com/en/1X0ADYAW/hktdc-research/Chongqing-On-Track-for-Europe-via-theYuxinou-Rail-Route, accessed on 17 April 2019.
54 For a holistic discussion on SCF see Basu Bal et al. (2018), pp. 35–54.
55 For example, article 9 of the Uniform Commercial Code (UCC) in the United States provides such
predictability. Also, an investor purchasing a receivable need to record that under the UCC filing
system.
Maritime Rules for Rail Carriage: China’s Initiative to. . .
53
future, traders in the Chongqing PFTZ may feel that trade credit and SCF would be
more suitable to support their trade when using the railway corridors.
5 The Possibility to Monetize Receivables
The car traders in Chongqing use the Chongqing-Xinjiang railway line for parallel
imports from Europe. The term “parallel imports” refer to completely built cars
imported from overseas markets via professional channels and are parallel to cars
imported via traditional channels. Cars imported through traditional channels are
sold at registered dealers of car manufacturers who provide sales, spare parts, service
and survey (referred to as 4S dealers). The parallel imported cars are up to 20%
cheaper than those imported through traditional channels. The parallel importers
have to show sound financials for securing license in China.
53 They buy cars from
exporters in Europe who are small dealers. After few years, once trust is established
between the traders, it is possible that the Chinese importers may request for open
account terms. The well-capitalized Chinese importers may be in a position to use
their own balance sheet to support the small car exporters. A number of strategies
have emerged in recent years to help traders, for example, leverage the importer’s
stronger financial position to help the exporter access low cost liquidity, so that the
exporter can then offer the importer extended payment terms. Some of these
strategies involve monetization of the importer’s trade accounts receivable. The
most common forms of trade receivables monetization include open account based
SCF and transferable instrument based SCF. Together, these two strategies are
generally referred to as reverse factoring, which is based on financial technology
to link importers, exporters, and financial institutions to improve cash flow, reduce
supply chain risk, and provide predictable return on investment for funders.
54
An open account based SCF relies on the sale of accounts receivable which
requires predictable laws and a proper filing system.
55 However, in China, selling
intangibles can be cumbersome and may expose the investor to additional legal risks,
such as fraud and insolvency. Also, the investor may be required to obtain lien
release from exporter’s lenders before the receivable can be sold. The existence of a
proper recording system for filing information about sale and purchase of receivables
is necessary as well. Therefore, a transferable instrument based receivables financing
programme using promissory notes or bills of exchange, governed under a chosen
53 HKTDC Research (2018) Chongqing: On Track for Europe via the Yuxinou Rail Route https://
hkmb.hktdc.com/en/1X0ADYAW/hktdc-research/Chongqing-On-Track-for-Europe-via-theYuxinou-Rail-Route, accessed on 17 April 2019.
54 For a holistic discussion on SCF see Basu Bal et al. (2018), pp. 35–54.
55 For example, article 9 of the Uniform Commercial Code (UCC) in the United States provides such
predictability. Also, an investor purchasing a receivable need to record that under the UCC filing
system.
Maritime Rules for Rail Carriage: China’s Initiative to. . .
53