Trade financing firm China Export Finance said it has been awarded a factoring license in China and is the first licensed foreign company in the sector to operate there.
This story first appeared in the February 15, 2010 issue of WWD. Subscribe Today.
The London-based company was approved for the license in December by the Tianjin Trade and Industry Bureau, which regulates business activity in the large northeastern Chinese province. The decision allows the firm to work throughout China on export and import transactions.
Established in 2004, China Export’s expertise is in transactions involving products sourced from China for export to western markets. In addition to London, the firm has offices in Shanghai, New York, Los Angeles and Hamburg.
The factoring operation is registered as CEF (Tianjin) Supply Chain Financial Service Ltd., a wholly owned subsidiary of China Export, and is based in Tianjin.
Karl Alomar, chief executive officer of China Export, said Tianjin is a newer commercial hub, which is distinguishing itself in supply chain finance as the “center of Chinese development and the leader in innovation.”
The establishment of China Export in China eliminates a step in the factoring process. Ordinarily, a Chinese factor working with a seller would have to collaborate with its counterpart in the West working for the buyer. Through China Export, the counterpart step can be eliminated. The Chinese vendor can sell its receivables to the trade finance firm, which would then make an advance payment to the vendor against the approval of a Western buyer. The buyer would then make payment directly to China Export when due.
“We work in China with Chinese sellers, and in our Western offices with Western buyers,” Alomar said. “We provide funding against invoices, allowing Chinese sellers up to 90 days credit time to buyers in the West.”
China Export received approval from China’s State Administration of Foreign Exchange, or SAFE, a government regulatory agency, to trade in foreign currencies when paying off export invoices. That’s a critical component because a Chinese seller can’t claim tax rebates from the government when a factor pays off on the invoice in local currency. That changes if the transaction is done through China Export. SAFE approval allows China Export to operate a banking base within Tianjin, where the finance firm will follow the same model it used to build its operation in the U.K.
“Working with SAFE allows payment in a foreign currency, which the government will recognize as payment for a foreign export, even though the payment originated in China,” Alomar said. In turn, the seller then can claim tax rebates from the government.
Alomar’s firm doesn’t take an ownership position in the goods it helps to finance. It works on procuring the necessary shipping documents. Factors in the U.S. often provide credit terms ranging from 45 to 60 days. China Export uses the 90-day time frame, which is the international trade standard, because shipping time is typically 30 days net of the time the goods arrive in the U.S., Alomar said.
China Export was doing business in China before initiating discussions last summer to obtain a factoring license. Tianjin had been marketed as the financial hub and innovation sector for the development of the export market. Transactions are in U.S. dollars, Alomar said. China Export’s Tianjin office is staffed by local residents.
“We see Chinese firms wanting to expand into Europe and the U.S. They are targeting the top markets, with the U.S. [considered] the biggest market. The others are the U.K., Germany, Canada and other European countries,” Alomar said.
He said the “huge amount of demand [from Chinese manufacturers] is larger than we’re willing to support at this stage,” noting the company is still building the Tianjin operation.
The transactional volume for China Export this year is expected to be in the “hundreds of millions, with the expectation that in a couple of years it could be north of $1 billion in annual trade volume,” Alomar said.
He declined to specify his firm’s fee structure, noting that it is a risk-based formula depending on variables on a case-by-case basis.
China Export’s new status “is a milestone in the Chinese factoring industry,” and will help the nation’s exporters to boost their volume, said Ni Xiang Yu, vice chairman of the Tianjin Economic Development Area.