Greater China Regional Conference 2018
Primed as a key driver to the region’s economic growth, China’s Belt and Road Initiative (BRI) will cover about 65 percent of the world’s population, contributing to one-third of the world’s GDP, and about a quarter of all the goods and services the world moves. The BRI is expected to change the way the world trades.
Cross-border payments, an important constituent of the BRI, was a highlight at the conference, and featured throughout the event.
Enhancing digital finance to stimulate growth in the Chinese economy
In 2015, China rolled out the “Made in China 2025” and “Internet Plus” initiatives, and the country has been on a journey of digital transformation since. Successful digitalisation is crucial for the future of the Chinese economy, and will contribute not only to faster GDP growth, but to growth tied to productivity, innovation and consumption levels.
Stephen Gilderdale, Chief Platform Officer, SWIFT, notes that Chinese banks have always been early adopters of financial technology.
China Construction Bank (CCB)’s General Manager of Cash Management, Li Guojian, says that technology has helped the bank offer a more competitive suite of product offerings to customers, while mitigating business and compliance risks. In April, CCB opened an automated branch in Shanghai, run by facial recognition, AI and virtual reality. It has also installed 1,600 smart machines at its 360 branches across the city.
Luo Hao, Head of Fintech Cooperation, Tencent agrees. He says that big data and blockchain technology will continue to feature widely in the digitalisation efforts of China in coming years. Despite the interest around AI, the technology is only likely to become more widespread in the next decade. In China, Big Data has also been written into the 13th five-year plan, underscoring the importance it plays in both the government and private sectors.
Oscar Ramos, Partner and Program Director, Chinaccelerator, adds that data is the cornerstone of all technology – it is what drives technology.
Also according to Gliderdale, the industry is innovating faster than we used to. He cited SWIFT gpi as an example. In China, ten Chinese banks have gone live on its global payments innovation initiative (gpi) since its launch in 2017. Seventeen other Chinese banks have committed to SWIFT gpi in China and are in the process of going live. Together, these 27 banks represent an estimated 86% of cross-border payment traffic conducted by Chinese banks in mainland China.
Standardisation is key to the development of cross-border payments on the Belt and Road, which SWIFT supports through the use of its international messaging standard to improve interconnectivity and interoperability between financial institutions.
Gliderdale concludes: “There should be a balance between offering new technology for the sake of and adapting this technology to meet customer needs.”
Opportunities along the Belt and Road Initiative: Faster cross-border payments
Since its launch in 2013, China’s BRI continues to offer significant global prospects for businesses by boosting the flow of trade, capital and services between mainland China and the rest of the world. Much of this success stems from China’s robust payments landscape and the innovations that run these payments.
But innovation is just one part of it. Michael Moon, Head of Payments Markets, Asia Pacific, SWIFT says that the internationalisation of the Renminbi is just as important a driver. As China grows in importance as a trade and investment partner to BRI economies, the use of the RMB for loans and trade settlements will increase.
Vina Cheung, Global Head of RMB Internationalisation and Head of Product Management, North Asia, Global Liquidity and Cash management, Asia Pacific, HSBC, adds that the BRI offers Chinese companies looking to globalise an avenue to connect with the international market, and helps global companies expand their operations in countries along the Belt and Road. In short, it is a global economic opportunity.
The BRI and RMB internationalisation are intrinsically linked. Sun Shangbin, Deputy General Manager, Bank of China Head Office Clearing Department & Director, Bank of China (Mauritius) Limited, explains that the BRI has provided a larger stage for the internationalisation of the RMB to thrive in; while the latter has defined conditions and parameters for the BRI to develop within.
However, Sun is quick to point out that only 15% of the total trade volume between China and countries along the Belt and Road are settled in RMB, with the rest settled in US dollars and other currencies. There is a strong potential for the RMB to be used more widely in the settlement of trades.
The challenge standing in the way of China’s economic success, according to Wu Chen, The Economist, China’s Editorial Director for The Economist Global Business Review and Director of Editorial Products is payments is still largely guided by the US dollar.
Bank of Communications’ General Manager for Research, Zhou Kunping, believes that banks should start addressing this by gaining a thorough understanding of their customers’ pain points. Banks should not sit on their laurels, but continue to explore ways to improve, such as the adoption of new technology.
Updates on compliance and the way forward for China
Financial crime compliance is imperative to every institution operating in today’s increasingly regulated financial markets. Banks are spending billions on risk and compliance. Some estimates have governance, risk and compliance costs accounting for 15 to 20%, meanwhile, some of the world’s biggest banks have tripled their compliance staff in the last 10 years. (Source: Bain & Co. 2016)
Investment towards compliance and anti-fraud technology forms a core part of these costs. Socrate Lao, Head of Strategy, Organization & Innovation at Société Générale China, says that big data and artificial intelligence is an important part of the bank’s compliance strategy, and is used to combat financial crime, increase efficiency and reduce costs.
However, SWIFT’s Sheppard, Head of APAC Financial Crime Compliance, Intelligence & Data Solutions, points out that meeting legal and regulatory requirements go beyond innovation. His view is echoed by Edie Zhang, Head of Financial Security & KYC Compliance, BNP Paribas (China) Ltd. While it is easy to see the benefits of big data for compliance, he cautions that the recent GDPR, and the presence of similar data privacy laws in China mean that the use of data will come under increasing scrutiny.
Eric Young, a Partner of Forensic Services at PwC, also stresses that even with automation, a certain level of manual supervision is needed. For example, machine learning requires the presence of a human team that studies behavioural patterns and decides which patterns to upload to the computer. Besides, artificial intelligence is in its early stages.
Zhang also believes that regulators are not necessarily looking to introduce complex processes for banks to comply with. Instead, they hope to see banks themselves identifying and assessing these risks, then taking proactive steps to address them.
Conducting timely due diligence is something that every organisation should invest in, Lao sums up. This involves the organisation sourcing for and collecting up-to-date information on counterparties, a tedious and time-consuming task that is best outsourced to a neutral external third-party. This is where SWIFT’s KYC registry comes in.
Rewiring the securities landscape in China
The Chinese securities market is going through an exciting time. China has been liberalising its capital markets and providing various market access channels to institutional investors for both inward and outward investment. The recently launched Stock Connect and Bond Connect bridge differences between global and domestic market practices, improving China securities accessibility and bringing it much closer to international standards.
Ben Li, Head of Client Services, Direct Custody and Clearing Estimating Services, HSBC China, says the Chinese market remains attractive for overseas customers. At HSBC Hong Kong, the number of accounts opened by Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect in the past four years was only about 1,200 accounts, but in the past four weeks, 400 to 500 new accounts were opened.
One challenge facing China is standardisation. More coordination among China SMIs and offshore SMIs will be required in order to improve cross-border investments in the long term.
SWIFT’s Alexandre Kech, Head of Estimating & FX Markets, APAC, points out that SWIFT continues to work closely with all market infrastructures and intermediaries involved today and tomorrow in the opening of China’s capital markets in order to deliver that vision of standardised, automated and efficient access to Chinese equities, bonds, funds and currency.