Xuefeng Sun - Supply Chain Finance_ Credit Empowers the Future-Springer (2022)

Supply Chain Finance
Xuefeng Sun

Credit Empowers the Future
Xuefeng Sun
Sinomet Technology and Culture Co., Ltd
Beijing, China
ISBN 978-981-19-3512-1 ISBN 978-981-19-3513-8 (eBook)

https://doi.org/10.1007/978-981-19-3513-8
Jointly published with China Machine Press

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ISBN of the Co-Publisher’s edition: 978-7-111-66065-1
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Preface I
The competition in the twenty-first century is no longer the competition between

enterprises, but the competition between supply chains. To be a great enterprise,
you must have a strong supply chain system to ensure that all enterprises in the
supply chain create value together. The difficulty and high cost of financing for
SMEs is a major obstacle to the development of supply chains and society as a
whole. Supply chain finance straddles the two fields of industry and finance and
is increasingly becoming an important tool to solve the problem of difficult and
expensive financing for SMEs. The essence of supply chain finance is to discover
the credit of SMEs and share the credit of core enterprises in the supply chain, so
as to empower SMEs with credit and turn credit into value. Traditional supply chain
finance solutions can only partially empower the supply chain and cannot deliver
financial resources to the end of the supply chain. The development of intelligent
technologies such as artificial intelligence, blockchain, cloud computing and big data
has made it possible for smart supply chain finance solutions to empower the entire
supply chain. The blockchain-based digital debt instruments can achieve multi-tier
transfer and transfer funds to the end of the supply chain, which is an innovative
practice of smart supply chain finance. From the perspective of the capital source
of the supply chain ecosystem, smart supply chain finance will show three stages of
development: “Exogenous supply chain finance—finance company + X—industrial
bank” and finally realize the perfect integration of industry and finance.
This book explains the connotation of supply chain finance in the intelligent
era, introduces the supply chain finance solutions based on blockchain and other
intelligent technologies and explores the possible new opportunities and new trends
in the development of supply chain finance in the intelligent era. It is aimed at
all companies and individuals who wish to understand supply chain finance and
introduce supply chain finance solutions.
Beijing, China Xuefeng Sun
v
Preface II
The year 2020 is destined to be a historic one. The new year began with the COVID-
19 outbreak, and while national efforts were made to contain the epidemic, the virus
took on a global dimension. The epidemic was accompanied by severe turmoil in
the global financial markets, with the Federal Reserve launching an unprecedented
“bottomless” rescue package and unlimited quantitative easing. The impact of this
series of black swan events may be far more dramatic and far-reaching than we can
imagine, and we are witnessing history at this moment, but we cannot foresee it.
Actually, long before 2020, history was already taking a turn for the worse, with
the gloom of counter-globalization and global systemic crisis gathering strength.
As Robin Niblett, Chief Executive of the Royal Institute of International Affairs, a
world-renowned think tank, said: “Globalization as we know is coming to an end.”
But this does not mean that globalization is wrong or that it is coming to an end, but
only that the way it was organized in the past did not lead to a win-win situation for
all. As a result, there are clear losers in the past model of globalization. Whoever is
able to provide a solution for the organization of globalization in the supply chain in
the future will take the lead in the new globalization landscape.
Under the turbulent macroscopic situation of the world, the global organization
of enterprises and supply chains is constantly changing, as the wave of counter-
globalization, trade conflicts, carbon emission reduction targets and the need for
many companies to reduce their dependence on long-distance supply chains, there is
also a vague tendency to de-globalize the supply chain. The root cause of this is that
there are still people who are victims of the old ways of organizing supply chains and
accordingly the losers, the biggest losers are the large number of small and medium-
sized enterprises (SMEs) that have little to gain. According to COFACE’s research
over the years, the strongest companies in the global supply chains are extending
their payment cycles to SMEs and increasing the proportion of overdue payments,
while the proportion of financial institutions willing to provide finance and credit to
SMEs is decreasing. It is clear that the division of labor in supply chains is making
it profitable for large enterprises and less viable for SMEs to survive. The old ways
of organizing supply chains is also not a real win-win situation, and new solutions
are needed.
vii
viii Preface II
The primary objective of innovation in supply chain finance is to better alleviate the
financing difficulties of SMEs. With the emergence and development of technologies
such as artificial intelligence, blockchain, cloud computing and big data, supply
chain finance solutions have become more powerful and robust. Under the traditional
supply chain finance model, core supply chain enterprises do not have direct benefits
and are not sufficiently motivated to participate in and support the solution, while
the new technology enables the overall cost and efficiency of the supply chain to be
reduced and the new benefits will bring value to both core enterprises and SMEs.
In the entire supply chain finance ecosystem, the lack of creditworthiness of SMEs
as the demand side of capital is the biggest obstacle to the delivery of capital in the
supply chain. However, the participation of SMEs in the supply chain in production
activities throughout the supply chain generates behavioral data that can be identified
and analyzed to create a good credit profile. The development of intelligent tech-
nology has made such behavior a reality, and core enterprises, financial institutions
and specialist fintech companies are all able to leverage technological capabilities to
move from data empowerment to credit empowerment for SMEs, thereby crossing
the financial barrier. From a perspective of business ecosystem integrity, groups can
make good use of fintech-enabled supply chain finance products as a powerful tool
to build a great supply chain.
This book provides a panoramic view of the supply chain finance system, precisely
from the perspective of the supply chain finance ecosystem, and illustrates different
supply chain finance models. It analyzes digital debt instruments in the context of
technical principles and concrete examples and deduces three stages in the devel-
opment of supply chain systems by groups. The analysis of these three stages is
of some reference value to various enterprises in building their own supply chain
finance products and models.
Beijing, China Xuefeng Sun

Contents
1 Background of Supply Chain Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.1 Great Enterprises Have Great Supply Chains . . . . . . . . . . . . . . . . . . . 2
1.1.1 What is a Great Enterprise? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.2 What is a Good Supply Chain? . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.3 Great Enterprises Create Value for Other Companies
in the Supply Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2 Challenges for Great Supply Chain—Difficult Financing
for SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2.1 Definition of SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2.2 Prominent Role of SMEs in National Economy . . . . . . . . . . . 6
1.2.3 Financing Situation of SMEs is Not Optimistic . . . . . . . . . . . 10
1.2.4 Increasing Difficulties in Financing SMEs Globally . . . . . . . 12
1.3 Feasible Solution—Supply Chain Finance . . . . . . . . . . . . . . . . . . . . . 12
1.3.1 Background of Development of Supply Chain Finance . . . . 13
1.3.2 Development Environment of Supply Chain Finance . . . . . . 14
1.3.3 Connotation of Supply Chain Finance . . . . . . . . . . . . . . . . . . . 20
1.3.4 Development History of Supply Chain Finance . . . . . . . . . . . 25
1.3.5 Market Prospects of Supply Chain Finance . . . . . . . . . . . . . . 26
Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2 Model of Credit Empowerment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.1 Supply Chain Finance Ecosystem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.1.1 Panorama of Supply Chain Finance Ecosystem . . . . . . . . . . . 29
2.1.2 Deconstruction of Capability of Supply Chain Finance
Platform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.1.3 Analysis of Types of Supply Chain Finance Platform . . . . . . 38
2.2 New Role of Supply Chain Finance Ecosystem—Credit
Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2.2.1 Information Asymmetry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2.2.2 Signaling Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2.2.3 Credit Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ix
x Contents
2.2.4 Capabilities Required for Credit Empowerment . . . . . . . . . . 44

2.3 Supply Chain Finance Models from Credit Empowerment
Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2.3.1 Model 1 of Credit Empowerment: Independent Credit
Intermediary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2.3.2 Model 2 of Credit Empowerment: Financial
Institutions as Credit Intermediaries . . . . . . . . . . . . . . . . . . . . 47
2.3.3 Model 3 of Credit Empowerment: Core Enterprises
as Credit Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
2.3.4 Model 4 of Credit Empowerment: Core Enterprise
System Has Both Functions of Credit Intermediaries
and Capital Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
3 Developement Stages of Credit Empowerment . . . . . . . . . . . . . . . . . . . . 53
3.1 Self-finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
3.1.1 Pecking Order Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
3.1.2 What Is Self-finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
3.1.3 What Is Supply Chain Self-finance . . . . . . . . . . . . . . . . . . . . . 55
3.1.4 Development Stages of Conglomerate’s Supply Chain
Self-finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
3.2 Credit Sharing + Supply Chain Finance . . . . . . . . . . . . . . . . . . . . . . . 56
3.2.1 Problems Faced by Supply Chain Finance in Credit
Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
3.2.2 Barriers to Credit Re-transmission . . . . . . . . . . . . . . . . . . . . . . 57
3.2.3 Tools for Credit Re-transmission: Digital Debt
Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
3.3 Finance Companies + Supply Chain Finance . . . . . . . . . . . . . . . . . . . 58
3.3.1 Significance of a group’s Finance Company . . . . . . . . . . . . . . 58
3.3.2 Business of the Group’s Finance Company . . . . . . . . . . . . . . 60
3.3.3 Supply Chain Finance Business of the Group’s
Finance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.4 Industrial Banks + Supply Chain Finance . . . . . . . . . . . . . . . . . . . . . . 69
3.4.1 Industrial Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.4.2 Competencies Required for Industrial Banks . . . . . . . . . . . . . 69
3.4.3 Transformation of Finance Companies into Industrial
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
3.4.4 Challenges to Transforming into Industrial Banks . . . . . . . . . 71
3.4.5 Suggestions for Transforming into Industrial Banks . . . . . . . 72
3.5 Examples of Self-financing Development of Foreign Groups . . . . . . 73
3.5.1 General Electric (GE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
3.5.2 Siemens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
3.5.3 Mitsubishi Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Contents xi
4 Technical and Legal Foundation of Digital Debt Instruments . . . . . . . 83

4.1 iABCDE Drives Fintech Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
4.2 Technical Foundation of Digital Debt Instruments . . . . . . . . . . . . . . . 83
4.2.1 Definition and Key Technical Features of Blockchain . . . . . 83
4.2.2 An Overview of the Distributed Ledge Model
of Blockchain Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
4.2.3 Key Features of Blockchain Technology . . . . . . . . . . . . . . . . . 91
4.3 Legal Basis of Digital Debt Instruments . . . . . . . . . . . . . . . . . . . . . . . 93
4.3.1 Meaning and Scope of Instruments . . . . . . . . . . . . . . . . . . . . . 93
4.3.2 General Legal Issues on Operation of Instruments . . . . . . . . 97
4.3.3 Instrumental Behaviors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
4.3.4 Other Legal Issues in Instrument Business . . . . . . . . . . . . . . . 102
5 Credit Empowerment Practice Based on Digital Debt
Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
5.1 Zhongjin Cloud: X Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
5.1.1 Introduction of Zhongjin Cloud . . . . . . . . . . . . . . . . . . . . . . . . 103
5.1.2 Introduction to the X Credit Model . . . . . . . . . . . . . . . . . . . . . 103
5.1.3 Business Essence and Legal Basis of the X Credit
Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.1.4 Value of the X-Credit Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
5.1.5 Current Market Development of the X Credit Model . . . . . . 110
5.1.6 Dilemma of the X Credit Model . . . . . . . . . . . . . . . . . . . . . . . . 110
5.2 CSCC: Cloud Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
5.2.1 Introduction of the Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . 111
5.2.2 Market Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
5.2.3 Solution—Cloud Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
5.3 Ouyeel Cloud E-commerce: Tongbao . . . . . . . . . . . . . . . . . . . . . . . . . . 115
5.3.1 Company Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
5.3.2 Ouyeel Cloud E-commerce Ecosphere . . . . . . . . . . . . . . . . . . 116
5.3.3 Ouyeel Cloud E-commerce Supply Chain Finance
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
5.3.4 Supply Chain Finance Product: Tongbao . . . . . . . . . . . . . . . . 117
5.4 Shanghai Huaneng E-Commerce: Huaneng Credit . . . . . . . . . . . . . . . 120
5.4.1 Company Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
5.4.2 Huaneng Intelligent Supply Chain Ecological Service
System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
5.4.3 Background and Significance of “Huaneng Credit”
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
5.4.4 Introduction of “Huaneng Credit” Product . . . . . . . . . . . . . . . 124
5.4.5 Application Value of “Huaneng Credit” Platform . . . . . . . . . 126
xii Contents
6 Introduction of Supply Chain Finance Solutions . . . . . . . . . . . . . . . . . . . 129

6.1 Diffusion of Innovations Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
6.1.1 Introduction to Diffusion of Innovations Theory . . . . . . . . . . 129
6.1.2 History of Diffusion of Innovations Theory . . . . . . . . . . . . . . 130
6.1.3 Essential Elements of Diffusion of Innovations . . . . . . . . . . . 130
6.1.4 Process of Diffusion of Innovations . . . . . . . . . . . . . . . . . . . . . 130
6.1.5 Decision for Innovation Adoption . . . . . . . . . . . . . . . . . . . . . . 131
6.1.6 Speed of Innovation Adoption . . . . . . . . . . . . . . . . . . . . . . . . . 132
6.1.7 Types of Adopters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
6.1.8 Outcomes of Adopting Innovations . . . . . . . . . . . . . . . . . . . . . 134
6.2 Introduction of Supply Chain Finance Solutions . . . . . . . . . . . . . . . . 134
6.2.1 Intra-Organizational Innovation . . . . . . . . . . . . . . . . . . . . . . . . 135
6.2.2 Stages of Introducing Supply Chain Innovation . . . . . . . . . . . 137
6.2.3 Adoption Model of Supply Chain Finance Innovation . . . . . 140
6.3 Cases of Introdution of Supply Chain Finance . . . . . . . . . . . . . . . . . . 141
6.3.1 Sinopec EPEC Supply Chain Finance . . . . . . . . . . . . . . . . . . . 141
6.3.2 Supply Chain Finance of China Railway Construction
Asset Management CO., Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
6.3.3 Supply Chain Finance of China Railway Factoring . . . . . . . . 148
6.3.4 CCCC Supply Chain Finance . . . . . . . . . . . . . . . . . . . . . . . . . . 149
6.3.5 Supply Chain Finance of State Grid E-commerce . . . . . . . . . 151
6.3.6 Summary of Experience in Building Supply Chain
Finance Platforms for SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
7 Risk Management in Supply Chain Finance . . . . . . . . . . . . . . . . . . . . . . 155
7.1 What is Risk? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
7.1.1 Supply Chain Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
7.1.2 Links of Supply Chain Finance Risks . . . . . . . . . . . . . . . . . . . 156
7.2 Risk Management of Supply Chain Finance . . . . . . . . . . . . . . . . . . . . 159
7.2.1 Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
7.2.2 Supply Chain Risk Management . . . . . . . . . . . . . . . . . . . . . . . 166
7.2.3 Risk Management of Supply Chain Finance . . . . . . . . . . . . . . 167
8 Future of Credit Empowerment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
8.1 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
8.2 Future Prospect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
8.2.1 Future Development Trends of Supply Chain Finance . . . . . 175
8.2.2 Road to Greatness for Conglomerates . . . . . . . . . . . . . . . . . . . 176
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
Chapter 1
Background of Supply Chain Finance
Martin Christopher, an international supply chain guru, asserted in 1992 that there
are only supply chains in the marketplace, not enterprises. The real competition is
no longer between individual enterprises, but between supply chains. In a sense, this
is indisputable, as enterprises in the supply chain become increasingly an intercon-
nected, unified and indivisible whole. As the value-creating entity evolves from an
enterprise to a supply chain or even an industrial network, it is important to look
at business from the perspective of the enterprise to the supply chain. In order to
create value, capital is an indispensable element and resource, and the integration of
industry and finance is also an inevitable path. In the supply chain, there are always
major and minor enterprises, strong and weak ones, and how the SMEs in the chain
can access financial resources becomes an indispensable condition to ensure the
efficient operation of the supply chain. As an innovative means of industrial supply
chain and financial activities, supply chain finance plays a huge role in solving the
financing problems of the MSMEs (Micro, Small and Medium-sized Enterprises) in
the chain by providing financial services to the supply chain entities, and has become
an important strategic tool.
To understand the background and history of supply chain finance innovation, we
need to understand, in turn, why it is so important to build a good and efficient supply
chain? Why is the difficulty of financing for MSMEs the biggest challenge to building
a good supply chain? What makes supply chain finance the best weapon to address
this challenge? What exactly is supply chain finance? What are the upgrades and
evolutions of supply chain finance in the process of solving the financing difficulties
of MSMEs? This chapter will explain.
© China Machine Press 2022 1

X. Sun, Supply Chain Finance,
https://doi.org/10.1007/978-981-19-3513-8_1
2 1 Background of Supply Chain Finance
1.1 Great Enterprises Have Great Supply Chains
1.1.1 What is a Great Enterprise?
According to Professor Liu Qiao, Dean of the Guanghua School of Management at

Peking University, a great enterprise is one that can create value consistently and over
time, and provide reasonable returns to shareholders, significant investors, consumers
and employees.
Looking back at the history of business over the past century or two, there are two
typical enterprises that can be called great enterprises: the first is General Electric
(GE). GE is an enterprise whose business revolves around electricity, and whose
founder was Thomas Edison. One of GE’s philosophies is that wherever electricity
goes, there is a place where business can be expanded to provide a better life for
people through electricity. The other one is IBM (International Business Machine).
IBM is a leader in the field of high technology, but its development has also had its
ups and downs. Change has been a major theme in IBM’s corporate history, and it
has continued to improve its value-creating capabilities in order to adapt to the new
era.
It is easy to see that for a enterprise to be great, it needs to have at least two basic
conditions: to create value for its stakeholders, and to be able to survive and grow in
a sustainable way. For enterprises in the supply chain, relying on the supply chain to
create value, in order to be great, they must have an excellent supply chain that can
create value, and the supply chain must constantly change to meet the challenges of
the times. To do both, enterprises must be able to lead and assist other enterprises
in the supply chain, especially SMEs, to develop together, so that their own supply
chain will become the best one that can continue to create value.
1.1.2 What is a Good Supply Chain?
What are the criteria for evaluating a good supply chain? How can you tell if an
enterprise has a good supply chain? Who are the enterprises in the world with the best
supply chains? Gartner Group, a world’s leading information technology research
and analysis company, has come up with relevant criteria and a list.
Since 2005, Gartner has been publishing a ranking of the world’s supply chains,
which features 25 global supply chain leaders chain leaders and highlights their
best strategies. In May 2019, the latest Gartner Supply Chain Executive Conference
named the Top 25 Global Supply Chains for 2019 (see Table 1.1), as the 15th edition
of the ranking, with Chinese retail giant Alibaba and Dutch chemical giant Akzo
Nobel ranked among the Top 25. Colgate—Palmolive came out on top for the first
time, with Inditex, Nestlé, PepsiCo and Cisco Systems in second to fifth place. Apple,
Amazon, Unilever, McDonald’s and P&G were singled out as Supply Chain Masters
after being the leading five for the seventh consecutive year.
1.1 Great Enterprises Have Great Supply Chains 3
Table 1.1 Top 25 global

Ranks Companies Headquarters Comprehensive
supply chains 2019
scores
1 Colgate-Palmolive U.S 4.88
2 Inditex Spain 4.80
3 Nestlé Swiss 4.27
4 PepsiCo U.S 4.22
5 Cisco Systems U.S 4.13
6 Intel U.S 4.12
7 HP Inc U.S 3.81
8 Johnson & Johnson U.S 3.80
9 Starbucks U.S 3.74
10 Nike U.S 3.73
11 Schneider Electric France 3.71
12 Diageo U.K 3.44
13 Alibaba China 3.43
14 Walmart U.S 3.40
15 L’Oreal France 3.38
16 H&M Sweden 3.35
17 3M U.S 3.34
18 Novo Nordisk Denmark 3.31
19 Home Depot U.S 3.29
20 Coca Cola U.S 3.13
Company
21 Samsung South Korea 3.05
Electronics
22 BASF Germany 2.89
23 Adidas Germany 2.75
24 Akzo Nobel Netherlands 2.61
25 BMW Germany 2.57
Source Gartner
What the companies on the list have in common is their ability to continuously
adopt a wide range of innovative technologies to improve their overall supply chains,
and their efforts to be more socially responsible and to promote environmental
protection and sustainable development. As Gartner puts it: “There are three key
characteristics of supply chain leaders who are committed to enhancing their capa-
bilities and further extending their competitive advantage: mass personalization, use
of ecosystem and business-oriented digital strategies.”
1.1.3 Great Enterprises Create Value for Other Companies

in the Supply Chain
Great enterprises must be able to lead and help other enterprises in the supply chain
to develop together, to create value for other enterprises in the supply chain and to
assist other enterprises in the supply chain to grow into good enterprises, so that there
are no weak links or laggards in the chain.
The best example of supply chain synergy is Apple, ranked number one in
Gartner’s Supply Chain Masters. Since the launch of the first iPhone in 2007, Apple’s
own growth has mobilized many of its suppliers to become market leaders.
A prime example is Foxconn. With iPhone, Apple has boosted Foxconn’s annual
revenue from US$38 billion to US$178.1 billion over a decade, making it one of the
world’s largest manufacturing giants in terms of number of employees.
Foxconn is not the only company driven by Apple, as lens maker Largan Precision
in Taiwan, China, saw its annual revenue increase by 700% as a direct result of iPhone,
making it one of the highest priced companies in Taiwan, China. Display glass
supplier Lens Technology doubled its market capitalization, chip supplier TSMC
tripled its net profit, and speaker supplier AAC Technology increased its revenue by
600%… There are numerous similar cases (see Table 1.2).
There are currently 36 listed companies that rely heavily on orders from
Apple, with at least 10% of their revenue coming from the company. Imagination
Technologies Group, for example, generates 45% of its revenue from Apple.
This shows that the success of iPhone is the result of a good supply chain, and
iPhone has in return created a great deal of value for all those in the supply chain.
Apple is not the only company with an excellent supply chain. The common
denominator of a good supply chain is that it creates value, and the value of the
supply chain can only be maximized if it creates value for all the players in the
supply chain.
1.2 Challenges for Great Supply Chain—Difficult

Financing for SMEs
1.2.1 Definition of SMEs
The criteria for defining SMEs vary from country to country, from economy to
economy, from stage to stage of economic development, and from industry to
industry, and change dynamically with the development of the economy. Coun-
tries generally define SMEs in qualitative and quantitative terms, with qualitative
indicators including the organizational form, financing method and industry status
of the enterprise, and quantitative indicators including the number of employees,
1.2 Challenges for Great Supply Chain … 5
Table 1.2 Share of revenue

Companies Share of revenue from Apple
from Apple for selected
(%)
suppliers
Cirrus Logic 79.00
Dialog Semiconductor plc 74.30
Cungho Online 54.10
Entertainment
Japan Display Inc. 53.80
Glu Mobile Inc. 52.70
COLOPL, Inc. 49.40
KLab Inc. 47.80
Zynga Inc. Class A 46.00
Imagination Technologies 45.20
Group
Invensense, Inc. 40.00
Voltage Incorporation 39.40
IGNIS LTD 38.10
Gumi, Inc. 37.70
Foster Electric Company, 37.40
Limited
Qorvo Inc. 34.00
NisshaCo. Ltd. 31.70
Japan Aviation Electronics 28.26
Insdustry, Limited
Cave Interactive Co., Ltd. 27.70
Ateam Inc. 27.30
Sharp Corporation 26.40
InterDigital, Inc. 25.00
Jabil Inc. 24.00
ATARI 23.00
GREE, Inc. 22.80
NOK Corporation 20.80
MinebeaMitsumi Inc. 19.70
Cognex Corporation 19.00
Knowles Corp 17.00
Marvelous Inc. 15.50
TTM Technologies, Inc. 15.00
Kingnet Network Co., Ltd. 14.05
Class A
Analog Devices, Inc. 14.00
enish, Inc. 13.10
(continued)
Table 1.2 (continued)

Companies Share of revenue from Apple
(%)
ePlus Inc. 13.00
BANDAI NAMCO Holdings 11.10
Inc.
Qualcomm 10.00
Source FactSet
paid-up capital and total assets. Quantitative indicators are more intuitive than qual-
itative indicators, and the data selection is easy, so most countries use quantitative
criteria to classify SMEs. For example, the United States Small Business Act intro-
duced by the Congress in 2001 defines SMEs as an enterprise having no more than
500 employees, while the UK and EU adopt quantitative indicators, and qualitative
indicators as auxiliary indicators.
The definition of SMEs in China has been adjusted six times, and the latest criteria
are the ones formulated by the Ministry of Industry and Information Technology, the
National Bureau of Statistics, the National Development and Reform Commission
and the Ministry of Finance in June 2011 according to the Law of the People’s
Republic of China on the Promotion of Small and Medium-sized Enterprises and the
Opinions of the State Council on Further Promoting the Development of Small and
Medium-sized Enterprises. The specific criteria are shown in Table 1.3.
1.2.2 Prominent Role of SMEs in National Economy
SMEs are an important force for China’s economic growth, social development,
employment creation and scientific and technological innovation, and are an indis-
pensable component of national economic development. According to data from
the National Bureau of Statistics, at the end of 2018, there were 369,000 industrial
SMEs, accounting for 97.6% of all industrial enterprises above the specified scale.
Among them, there were 50,000 medium-sized enterprises, accounting for 13.5% of
the number of SMEs; and 319,000 small enterprises, accounting for 86.5% (Fig. 1.1).
According to the survey conducted by the Bureau of Small and Medium Enter-
prises of the Ministry of Industry and Information Technology, in 2018, China’s
small and medium enterprises achieved a main business income of 57.9 trillion yuan,
accounting for 56.7% of the main business income of enterprises aboved the specified
scale, an increase of 8.4% year-on-year, with a growth rate of 0.9 percentage points
lower than that of the previous year, 0.1 percentage points lower than the growth rate
of enterprises above the specified scale (8.5%) and 0.3 percentage points lower than
the growth rate of large industrial enterprises (8.7%) in the same period. Among them,
medium-sized enterprises achieved 23.3 trillion yuan of main business income, an
increase of 8.7% year-on-year; small enterprises achieved 34.7 trillion yuan of main
Table 1.3 Criteria for the classification of micro, small and medium-sized enterprises in China
Sectors Medium-sized enterprises Small enterprises Micro enterprises
Employees Operating Total assets Employees Operating Total assets Employees Operating Total assets
(person) revenue (10,000 yuan) (person) revenue (10,000 yuan) (person) revenue (10,000 yuan)
(10,000 yuan) (10,000 yuan) (10,000 yuan)
Agriculture – < 20,000 – – < 500 – – < 50 –
≥ 500 ≥ 50
Industry < 1000 < 40,000 – < 300 < 2000 – < 20 < 300 –
≥ 300 ≥ 2000 ≥ 20 ≥ 300
Construction – < 80,000 < 80,000 – < 6000 < 5000 – < 300 < 300
industry ≥ 6000 ≥ 5000 ≥ 300 ≥ 300
Retail industry < 300 < 20,000 – < 50 < 500 – < 10 < 100 –
1.2 Challenges for Great Supply Chain …
≥ 50 ≥ 500 ≥ 10 ≥ 100
Wholesale < 200 < 40,000 – < 20 < 5000 – <5 < 1000 –
trade ≥ 20 ≥ 5000 ≥5 ≥ 1000
Transportation < 1000 < 30,000 – < 300 < 3000 – < 20 < 200 –
industry ≥ 300 ≥ 3000 ≥ 20 ≥ 200
Warehousing < 200 < 30,000 – < 100 < 1000 < 20 < 200
industry ≥ 100 ≥ 1000 ≥ 20 ≥ 100
Postal industry < 1000 < 30,000 – < 300 < 2000 < 20 < 100
≥ 300 ≥ 2000 ≥ 20 ≥ 100
Hotel industry < 300 < 10,000 – < 100 < 2000 < 10 < 100
≥ 100 ≥ 2000 ≥ 10 ≥ 100
Catering < 300 < 10,000 – < 100 < 2000 < 10 < 100
industry ≥ 100 ≥ 2000 ≥ 10 ≥ 100
(continued)
7
8

Sectors Medium-sized enterprises Small enterprises Micro enterprises
Employees Operating Total assets Employees Operating Total assets Employees Operating Total assets
(person) revenue (10,000 yuan) (person) revenue (10,000 yuan) (person) revenue (10,000 yuan)
(10,000 yuan) (10,000 yuan) (10,000 yuan)
Information < 2000 < 100,000 – < 100 < 1000 < 10 < 100
transmission ≥ 100 ≥ 1000 ≥ 10 ≥ 100
industry
Software & IT < 300 < 10,000 – < 100 < 1000 < 10 < 100
service ≥ 100 ≥ 1000 ≥ 10 ≥ 50
industry
Real estate – < 200,000 < 10,000 – < 1000 < 5000 – < 100 < 2000
development ≥ 1000 ≥ 5000 ≥ 100 ≥ 2000
Property < 1000 < 5000 – < 300 < 1000 – < 100 < 500
management ≥ 300 ≥ 1000 ≥ 100 ≥ 500
Leasing and < 300 < 120,000 – < 300 < 120,000 – < 10 < 100 –
business ≥ 100 ≥ 8000 ≥ 10 ≥ 100
service
industry
Other unlisted < 300 – – < 300 – – < 10 – –
industries ≥ 100 ≥ 10
The data are compiled according to the definition of small and medium-sized enterprises in each industry in the Criteria for Classification of Small and Medium-
sized Enterprises formulated by four ministries and commissions in 2011. Both two criteria, namely the number of employees, business income and total assets
are considered in identification of medium-sized and small enterprises, while the classification of micro-enterprises is only based on either of the two criteria.
E.g., for industrial enterprises, those with less than 1000 employees or business income of less than 400 million yuan are medium-sized, small and micro
enterprises. Among them, those with 300 employees and above, and business income of 20 million yuan and above are medium-sized enterprises; those with
20 employees and above, and business income of 3 million yuan and above are small enterprises; and those with less than 20 employees or business income of
less than 3 million yuan are micro enterprises
1 Background of Supply Chain Finance
Fig. 1.1 Proportion of Large-scale

SMEs in all enterprises at the enterprises 2.4%
end of 2018. Source National Medium-sized
Bureau of Statistics enterprises, 13.2%
Small enterprises
84.4%
business income, an increase of 8.1%. Figure 1.2 presents main business income of
China’s SMEs from 2013 to 2018.
In 2018, China’s SMEs achieved total profits of 3.4 trillion yuan (Fig. 1.3),
accounting for 51.6% of the total profits of enterprises above the specified scale,
an increase of 9.7% year-on-year, with a growth rate of 5.1 percentage points lower
than that of the previous year; 1.1 percentage points higher than the growth rate of
70 10.0%
9.2% 9.0%
60 8.8% 57.9
8.4%
53.4 8.0%
48.9
50 46.1 7.0%
44.5
40.9
6.1% 6.0%
40
5.0%
30
4.0%
3.6%
20 3.0%
2.0%
10
1.0%
0 0.0%
2013 2014 2015 2016 2017 2018
Main business income (trillion yuan) Year-on-year growth rate (%)
Fig. 1.2 Main business income of SMEs in China, 2013–2018. Source Bureau of Small and Medium
Enterprises, Ministry of Industry and Information Technology
4 16.0%
14.8%
3.5 3.4 14.0%
3.1
3 12.0%
2.7
2.5
2.5 2.4 10.0%
2.3 9.7%
2 8.0% 8.0%
1.5 6.0%
1 4.3% 4.2% 4.0%
0.5 2.0%
0 0.0%
2013 2014 2015 2016 2017 2018
Total profit (yuan) Year-on-year growth rate (%)
Fig. 1.3 Total profit of SMEs in China, 2013–2018. Source Bureau of Small and Medium
Enterprises, Ministry of Industry and Information Technology
enterprises above the specified scale (10.3%) and 2.2 percentage points higher than
the growth rate of large-scale enterprises (9.2%) in the same period. Among them,
total profits of medium-sized enterprises were 1.6 trillion yuan, an increase of 11.0%;
total profits of small enterprises were 1.9 trillion yuan, an increase of 11.8%.
Thus, it can be seen that SMEs are an important part of China’s economy and
have made great contributions to the economy, and the rapid development of China’s
economy cannot be achieved without SMEs.
1.2.3 Financing Situation of SMEs is Not Optimistic
What is not consistent with the great contribution of SMEs to China’s economy is
that SMEs are significantly undersupported, especially in terms of financing.
According to a survey conducted by the Bureau of Small and Medium Enterprises
of the Ministry of Industry and Information Technology, 38.8% of the SMEs with
financing needs have not been satisfied, and some financial institutions are reluctant
to lend to SMEs, they often refuse to renew loan contracts, recover loans and even
stop lending to them. Data from the CBIRC show that as of the end of 2018, the
balance of loans to small and micro enterprises nationwide was 33.49 trillion yuan,
accounting for 23.81% of the balance of various loans.
In recent years, small and micro enterprises have developed rapidly and played a
very important role in economic development, and they are a driving force of devel-
opment, a main channel of employment and an important source of innovation. As of
the end of 2017, there were about 28 million small and micro enterprise legal persons
and 62 million individual industrial and commercial households in China, and small,
medium-sized and micro enterprises (including individual industrial and commercial
households) accounted for more than 90% of all market entities, contributing to more
than 80% of the country’s employment, more than 70% of invention patents, more
than 60% of GDP and more than 50% of tax revenue.
The Report on China’s Financial Services for Small and Micro Enterprises (2018)
released by the Central Bank and the CBIRC shows that: in terms of service coverage,
as of the end of 2018, loans were granted to 2.37 million small and micro enterprise
legal persons, an increase of 560,000 or 30.9% year-on-year, but the number the legal
persons granted loans still accounted for only 18% of the total number of small and
micro enterprise legal persons; in terms of loan balance, as of the end of 2018, the
balance of loans to small and micro enterprise legal persons in China was 26 trillion
yuan, accounting for 32.1% of all enterprise loans, but among them, the balance of
loans to small and micro enterprises with a single credit line of less than 5 million
yuan was only 1.83 trillion yuan, and the balance of inclusive loans to small and
micro enterprises was 8 trillion yuan. The above figures illustrate the disadvantaged
position of small and micro enterprises in financing and the gap between the financing
support they receive and their national economic status.
According to the Social Financing Cost Index released by Tsinghua University
in 2018, the current average cost of social financing in China is 7.6%. However,
channels such as bank loans, corporate bonds and pledging of listed companies’
equity with lower funding costs are mainly available to large enterprises such as
state-owned enterprises and listed companies, and for most small, medium-sized
and micro enterprises, bank loans are not highly available, and they rely more on
factoring, petty loan companies, online loans and other ways with higher funding
costs to obtain financing (Table11..4).
Table 1.4 Composition of social financing costs in China

Main financing entities Types of social Average financing cost Proportion (%)
financing (%)
State-owned enterprises Bank loans 6.60 54.84
Government platforms Trade acceptance 5.19 11.26
Listed companies
Corporate bonds 6.68 16.50
Equity pledge of listed 7.24 3.39
companies
Financing trust 9.25 7.66
Finance lease 10.70 3.95
Small and medium-sized Factoring 12.10 0.43
enterprises Petty loan companies 21.90 0.87
Non-listed private
enterprises Internet finance (online 21.00 1.10
lending)
Overall 7.16 100.00
Source Social financing cost index published by Tsinghua University in 2018
The Covid-19 epidemic that started at the beginning of 2020 has made the situation
of SMEs even worse. According to a survey conducted by Professor Zhu Wuxiang
and others at the School of Economics and Management of Tsinghua University on
995 SMEs, 34% of the enterprises could maintain operation for only 1 month, 33.1%
could maintain operation for 2 months and 17.91% for 3 months due to the epidemic.
1.2.4 Increasing Difficulties in Financing SMEs Globally
According to a report by the Global Supply Chain Finance Forum (GSCFF,2015),

between 1978 and 2013, international trade settlement of funds gradually shifted
from letters of credit (L/C) to open account), and a 2018 report by the International
Chamber of Commerce (ICC) found that about 80% of international trade now adopts
open account, gradually increasing the financial pressure on small and medium-sized
suppliers. The report also points out that major global banks have withdrawn from
developing markets, thus limiting access to trade finance, and the trade financing gap
has widened to around 1.5 trillion U.S. dollars. Small and medium-sized enterprises
have confronted varying degrees of impact, with more than half of SMEs’ trade
financing needs turned away by banks and more than 70% of them having no other
access to financing. Meanwhile, according to a survey report published in July 2019
by COFACE, a global credit insurance leader, Asia–Pacific enterprises generally
faced greater pressure in 2018, with the average credit term increasing from 64 days
in 2017 to 69 days in 2018, and the average late payment time increasing from 84 days
in 2017 to 88 days in 2018. The performance of Chinese enterprises was even worse,
with the average credit term rising from 76 days in 2017 to 86 days in 2018, and
the number of enterprises willing to provide credit terms fell from 73.6% in 2017 to
67.3% in 2018, 62.9% of enterprises had experienced late payments, 40% of them
had increased the duration of late payments. 38.8% of enterprises were overdue for
more than 90 days on average, and 55.3% of enterprises are overdue for a long time
and the amount of overdue payment accounts for more than 2% of their revenue.
SMEs plays a huge role in the national economy, there are also a large number of
SMEs in various supply chains with irreplaceable roles and functions. The financing
difficulties of SMEs will inevitably affect their functions and eventually have an
adverse impact on supply chain performance, so the difficulty of financing SMEs is
a major threat to supply chain performance.
1.3 Feasible Solution—Supply Chain Finance
In recent years, supply chain finance has been developing rapidly around the world
due to its important role and great potential in financial service entities. In particular,
it has increasingly become an important means to solve the problem of difficult
financing and expensive financing for SMEs.
1.3 Feasible Solution—Supply Chain Finance 13
1.3.1 Background of Development of Supply Chain Finance
The birth of supply chain finance is to solve the problem of capital flow obstruction
and capital flow optimization in the supply chain, while the shortage of capital and
the obstruction of capital flow mostly occur in the link where SOEs are located in the
supply chain. In other words, the main reason for the birth of supply chain finance is
because of difficult and expensive financing for SMEs in the supply chain. Along with
the new round of globalization and the rise of technology revolution and supply chain
is empowered by global openness and financial technology, supply chain finance is
increasingly becoming one of the important channels to expand financing for SMEs.
The new trend provides the foundation for the development of supply chain finance
from three levels: macro, medium and micro.
Macro Foundations
The trend of trade globalization has created new trade financing models The
trend of globalization of international trade has brought about the globalization of
finance, and the trend of globalization of trade inevitably requires the financial market
to provide flexible, efficient and sustainable financing products or services centering
on the supply chain.
Supply chain finance has risen to the level of national strategy The difficulty
of financing for SMEs is the endogenous driving force for the development of supply
chain finance. In order to solve the financing problem of SMEs, in 2017, the General
Office of the State Council issued the Guidance on Actively Promoting Innovation
and Application of Supply Chain, proposing to actively and steadily develop supply
chain finance, which was the first time for the state to indicate the direction for the
development of supply chain finance.
Industrial Foundations
“Industry + Finance + Technology” new industrial ecological supply chain
finance Financial technology promotes the development of digitalization, informa-
tization and internet, which changes supply chain process, channel and structure,
further strengthens the collaboration between financial capital and real economy,
and constructs the mutual benefit and synergistic development of finance, enterprises
and supply chains, thus giving birth to the new industrial ecosystem highlighting
sustainable development of “Industry + Finance + Technology”.
Micro Foundation
Financing to satisfy structural needs As a result of the unique characteristics of
supply chain, enterprises have the problem of time gap between transaction expenses
and income, which causes short-term capital shortage to affect the normal operation
of enterprises, and accordingly structural financing needs are born.
The importance of supply chain management is highlighted According to the
“Supply Chain Finance Market Research Report 2019” by Middle Class Survey, 30%
of entrepreneurs attached importance to supply chain management in 2004; in 2012,
the proportion rose to 50%; until 2019, 70% of enterprises considered supply chain
management as the most important core competitiveness of enterprises, and only on

the basis of sound supply chain management can they provide low-cost financing
services.
1.3.2 Development Environment of Supply Chain Finance
Policy Environment
In recent years, China’s government departments have emphasized the role of supply
chain finance in national policy documents several times: in 2017, five authorities
including the People’s Bank of China issued the “Guidance on Financial Support
for the Construction of a Strong Manufacturing Country”; in 2017, the General
Office of the State Council issued the Guiding Opinions on Promoting Supply Chain
Innovation and Application; in 2018, the Eight authorities including Ministry of
Commerce issued the Notice on Supply Chain Innovation and Pilot Application,
and the Public Announcement on the Evaluation Results of National Pilot Cities
and Enterprises of Supply Chain Innovation and Application. The description of
the documents also shows that the government departments are paying more and
more attention to supply chain finance, at first it was only stated in the official
documents that the development of business such as “accounts receivable financing,
bill discounting, warehouse receipt pledge, financing under letter of credit” should
be encouraged. In October 2017, the General Office of the State Council issued the
Guidance on Promoting Supply Chain Innovation and Application, which included
“actively and steadily developing supply chain finance” as one of the six major tasks,
marking that the government has raised the development of supply chain finance to an
unprecedented height. On January 14, 2019, Shenzhen issued the first domestic local
guidance document on supply chain finance development, which became the vane
of the national supply chain innovation cities. On February 14, 2019, the General
Office of the CPC Central Committee and the General Office of the State Council
issued 18 Opinions on Financial Services for Private Enterprises”, which ushered in
new guidelines for finance empowering industries. On February 18 of the same year,
the Outline of the Development Plan of Guangdong, Hong Kong and Macao Greater
Bay Area was released, and supply-side structural reform, financial technology and
risk prevention were written into the outline. Table 1.5 presents supply chain finance
policies promulgated by China from 2014.
At the local level, in order to implement the “Guiding Opinions on Promoting
Supply Chain Innovation and Application”, various regions have responded to follow
up. Chongqing, Tianjin, Shanghai, Shaanxi, Jiangsu, Guangdong and many other
provinces and cities have issued corresponding specific division of labor to implement
the policy. For example, in March 2018, the General Office of Chongqing Munic-
ipal People’s Government issued the Notice on Implementing and Advancing the
Division of Tasks for Guiding Opinions on Promoting Supply Chain Innovation and
Application. In April, the General Office of Tianjin Municipal People’s Government
issued the Implementation Opinions on Further Advancing Supply Chain Innovation
Table 1.5 Summary of China’s supply chain finance policies

Time Policies Issuing authorities
2014.09 Medium and long-term plan for the State Council
development of logistics industry
(2014–2020)
2015.05 Opinions on Vigorously developing State Council
electronic commerce to accelerate the
cultivation of new economic driving
forces
2015.09 Opinions on promoting online/offline General Office of the State Council
interaction to accelerate the
transformation and upgrading of
innovation and development of commerce
circulation
2015.11 Action plan on the implementation of the Ministry of Industry and Information
state council’s guidance on actions to Technology
actively promote “internet + ”
(2015–2018)
2016.02 Several opinions on financial support for 8 ministries and commissions including
stable growth, structural adjustment and the Central Bank
improved efficiency of industry
2016.09 Special action plan for cost reduction and National development and reform
efficiency improvement in the logistics commission
industry (2016–2018)
2016.11 “Thirteenth Five-Year Plan” for the 10 authorities including the Ministry of
development of domestic trade circulation Commerce, National Development and
Reform Commission, People’s Bank
2017.01 Thirteenth five-year plan for the 5 authorities including Ministry of
development of commerce and logistics Commerce, National Development and
Reform Commission
2017.03 Guiding opinions on financial support for 5 authorities including People’s Bank,
the construction of a strong Ministry of Industry and Information
manufacturing country Technology
2017.04 Special action plan for accounts People’s Bank, Ministry of Industry and
receivable financing of small and micro Information Technology, Ministry of
enterprises (2017–2019) Finance, Ministry of Commerce and other
authorities
2017.08 Opinions on further promoting logistics General Office of the State Council
cost reduction and efficiency
improvement for real economy
development
2017.10 Guidance on actively promoting General Office of the State Council
innovation and application of supply chain
2018.04 Notice on supply chain innovation and 8 authorities including Ministry of
pilot application Commerce
(continued)

Time Policies Issuing authorities
2018.10 Notice on announcing the list of national 8 authorities including Ministry of
pilot cities and enterprises of supply chain Commerce
innovation and application
2019.02 Several opinions on strengthening General Office of the CPC Central
financial services for private enterprises Committee and General Office of the
State Council
2019.04 Guiding opinions on promoting the General Office of the CPC Central
healthy development of small and Committee and the State Council
medium enterprises
2019.07 Guiding opinions on promoting supply CBIRC
chain financial services for the real
economy
2020.02 Measures for management of People’s Bank of China
standardized notes (Draft for comments)
Source Based on Supply Chain Finance Innovation Development Report (2019) by Tongdun
Technology and China Supply Chain Finance Industry Development Report 2019 by Jing Data
and Application. At the same time, on the basis of 55 pilot cities and 266 pilot enter-
prises of national supply chain innovation and application, each local government has
also identified further local key cultivation and development goals according to their
respective industrial clusters and regional economic features. For example, in August
2019, Zhejiang Province released the Implementation Opinions of the General Office
of Zhejiang Provincial People’s Government on Actively Promoting Supply Chain
Innovation and Application”; In October 2019, Jiangsu Province reviewed, publi-
cized and identified 125 enterprises such as Jiangsu Eastwell Supply Chain Manage-
ment Co., Ltd. and the original 33 national pilot enterprises as the first batch of key
incubation enterprises in Jiangsu Province. The local governments are taking the pilot
or key incubation cities, enterprises and industrial chains as the grasp, and introduce
incentive policies as target guidance, which has become an important driving force
to promote the development of supply chain finance in recent years.
Economic Environment
The total supply of China’s financial industry is sufficient, but there are supply-
side structural problems According to data released by the National Bureau of
Statistics, the value added of China’s financial sector accounted for 7.68% of GDP
in 2018, down from the historical peak of 8.44% in 2015. However, it was still
at a relatively high level compared to the historical past. In comparison, the value
added of the financial sector in the U.S. was 7.5% of GDP in 2017, and the figure
has not exceeded 8% for a single year in the last decade. It can be seen that the
total financial supply in China is sufficient. Judging from the number of financial
institutions, in addition to the six major state-owned banks, there are thousands of
small and medium-sized commercial banks all over the country, and the supply of
financial services is relatively abundant.
Although the total financial supply is abundant, there is an internal structural

imbalance. First of all, the structure of financial market is unbalanced, and the propor-
tion of bank-based indirect financing is much higher than that of direct financing.
Moreover, the supply structure within the existing banking system is unbalanced,
and the supply to SMEs is insufficient. Finally, there is an unbalanced structure of
products and services. The head office of the bank is the designer of products and
services, and it is often difficult for local branches to make adaptations according
to the characteristics of local economies, which often results in single and homo-
geneous products, making it difficult to precisely meet the differentiated needs of
customers of different sizes and business characteristics from different industries in
the actual market.
The government further intensified its efforts to solve the problem of difficult
and expensive financing for SMEs On June 20, 2018, Premier Li Keqiang hosted
an executive meeting of the State Council to deploy efforts to further alleviate the
problem of difficult and expensive financing for SOEs. In August 2018, the Financial
Stability Development Committee of the State Council held its second meeting,
which emphasized that under the condition of maintaining a reasonable abundance
of total liquidity and in the face of the problem of difficult and expensive financing
for the real economy, more attention must be paid to opening up the monetary policy
transmission mechanism and improving the capacity and level of service to the real
economy. Immediately afterwards, the CBIRC issued official documents one after
another and introduced policies, and said that it would continue to introduce policies
to open up the monetary policy transmission mechanism.
Scandals and defaults of large enterprises are frequently reported On one
hand, the domestic economy is weak currently and the global competition is increas-
ingly fierce; on the other hand, China is still in a critical period of transformation and
upgrading and supply-side reform is still in progress. Many large groups, listed
companies have also faced greater development pressure, “scandals” and “bond
defaults” occur frequently. There are many reasons for the current crisis of many
large enterprises, including market downturn, capital chain and leverage problems,
political and policy influences, internal management and operation problems, etc.
In addition to the systemic risks brought about by politics and policies and internal
management and operation problems, other problems can be attributed to the supply
chain competitiveness, that is, the entire supply chain or even the entire industrial
ecology in which the enterprise is located has a problem. The problems of a single
node or a single link are transmitted to other nodes and links.
Financial Environment
China’s financial supervision will not be slackened until the task of “preventing and
resolving major risks” is completed.
Regulation of pseudo-financial institutions In April 2018, the Ministry of
Commerce issued a notice specifying that since April 20, the responsibility of
formulating business operation and supervision rules for financial leasing compa-
nies, commercial factoring companies and pawnbrokers has been assigned to the
China Banking and Insurance Regulatory Commission (CBIRC). At present, the
CBIRC begins intensive research, meetings and discussions on the above industries.
On the basis of the research, new regulatory documents are being formulated, and the
pseudo-financial industry will usher in a new regulatory era of enhanced supervision.
In the future, these three industries will face more standardized and strict regulation,
institutional access and business development may be affected to a certain extent in
a short term, but the long-term development of the industry will be more healthy and
sound.
Banking supervision In recent years, banks are frequently scandalized, inade-
quate internal control, insufficient system implementation are the root cause of most
violations, so CBIRC has frequently issued fines in large amounts. The sky-high
penalties can not only adjust the flow of funds, but more importantly, crack down on
cross-sector financial violations and set up a firewall for the entire financial system
to avoid the outbreak of cross-sector financial risks.
New regulation on capital management The regulator has issued new regula-
tions on capital management to unify the rules and standards of capital management
business, eliminate multi-layer nesting and channels, break rigid cashing, regulate
capital pools and rectify financial chaos.
Severe rectification of internet finance, strict regulation of private lending
behaviors It is foreseeable that China’s financial supervision will not slacken before
the completion of the task of "preventing and resolving major risks".
The road to technology-intensive banking The deep integration of emerging
technologies with the financial industry, represented by big data, cloud computing
and block-chain, is driving the traditional financial industry into the fast lane of trans-
formation and development. The integration of finance and technology is not only
at the technical level, but also a comprehensive integration of thinking, philosophy,
business model and management model. Currently, more and more banks have set
up their own fintech subsidiaries, while many banks are actively cooperating with
third-party fintech institutions. According to the positioning and purpose of busi-
ness, the fintech subsidiaries directly established by banks can be further subdivided
into three categories: independent IT department, fintech output and group integra-
tion. In the cooperation with third-party fintech institutions, banks mainly value risk
control applications, while they are not so enthusiastic about cooperation in customer
acquisition and credit business.
Industrial Environment
The development of China’s supply chain management is not mature enough, and
the supply chain system has not yet been fully established, resulting in a lower level
of efficiency of the entire supply chain efficiency management than that of developed
countries. Between 2010 and 2018, China’s total social logistics costs rose from 7.1
trillion yuan to 13.3 trillion yuan, and the ratio of total social logistics costs to GDP,
although lower than a few years ago, is still as high as 14.8%, much higher than
that of European and American countries, which is 7–8%. In the financial sector,
on one hand, banks and other financial institutions are facing the real pressure of
the state’s requirements for financial institutions to help the development of the real
economy, especially SMEs, and on the other hand, it is an important strategic choice
for many financial institutions to make efforts on the business side, or the corporate
finance market. In the internet and mobile internet era, the internet has brought great
changes to life and the industry, people have witnessed the rise of big and small giants
(BATJ—Baidu, Ali, Tencent, Jingdong; TMD—Toutiao, Meituan, DiDi), and also
experienced the convenience brought by the full penetration of mobile payment to
life. In the field of financial services, the customer-side entrance of mobile payment
is shared by AT (Ali, Tencent), and the market monopoly brought by the internet
effect makes many financial institutions incapable despite their intentions. In order
to avoid repeating the same mistake, it is the choice of banks and other financial
institutions to make a head start on the business-side, or the corporate finance market
to occupy their own place.
In recent years, the development of financial technology, represented by big data,
cloud computing and artificial intelligence, has changed the means and methods of
information collection, customer access and risk control of traditional finance. Under
the new situation, in order to maintain competitiveness, the banking industry must, on
one hand, consolidate the foundation of its digital capability, and on the other hand,
upgrade its service concept, actively promote the integration of financial services with
various industrial chains, provide better service experience for corporate customers,
and avoid the embarrassing situation of the customer side payment market being
fully occupied by AT (Ali and Tencent) from recurring.
Supply chain finance has become an important grasp and business entry point
for banks and other financial institutions to make efforts in business-side financial
services.
Technical Environment
In the past two years, or the current stage, the development of fintech reflects the
following characteristics:
Big data and intelligent analysis of data The value of data has been profoundlyy
rooted in people’s heart, various types of data are accumulated, and more and
more enterprises using big data for risk control have appeared in the financial field.
However, there are still some problems and there is still a long way to go: the amount
of data on the consumer side is large, but the amount of data on the enterprise side
is still insufficient; there are more data in online scenarios and not enough data in
offline scenarios; the government has a large amount of data in its hands, but the data
of various departments are fragmented; the data precipitation of individual industries
with a high degree of dispersion has been of a certain scale; the openness of public
data resources is insufficient, and the laws and regulations, standards and commercial
mechanisms related to the openness and sharing of corporate data resources are not
mature.
The emergence of block-chain technology and its application in the financial
field is later compared with big data, but its value is recognized faster compared
with big data + AI, mainly because of the natural adaptation of block-chain and
finance, especially supply chain finance, thanks to the model innovation of block-
chain + supply chain finance. However, block-chain + supply chain finance has not
yet reached the stage of popularization and maturity either, as it has not yet reached
the level of popular application in terms of technical reliability, business benefit

distribution mechanism and model, market recognition and regulatory regulation.
However, in view of the inestimable value of block-chain in the financial field, there
are already many enterprises that are actively exploring, developing and applying
block-chain technology.
The integrated application and innovation of block-chain, big data + AI and
IoT technology is also a major trend. Different technologies give rise to different
efficiencies to enable data collection, storage, fidelity, analysis and application, which
will greatly enhance the customer acquisition, service and risk control capabilities
of finance in the future.
1.3.3 Connotation of Supply Chain Finance
The previous text introduces the main role and mission of supply chain finance,
which is to solve the dilemma of difficult financing for SMEs, and the background of
the development of supply chain finance. Next, we need to figure out what is supply
chain finance as clearly as possible. In order to explore what supply chain finance is,
we must clarify what is supply chain.
Supply Chain
The Guiding Opinions on Actively Promoting the Innovation and Application of
Supply Chain issued by the General Office of the State Council in 2017 (GBF [2017]
No. 84), supply chain is clearly defined: supply chain is an organizational form
that takes customer demand as the guide, aims to improve quality and efficiency,
and integrates resources as a means to achieve efficient collaboration in the whole
process of product design, procurement, production, sales and service.
Supply Chain Management

Supply chain management (SCM) was introduced by Michael E. Porter in 1985
and has been defined in various ways. According to the definition of the Council of
Supply Chain Management Professionals, SCM includes planning and managing
supply chain procurement, conversion (i.e. processing and production) and all
logistics activities, especially the coordination and cooperation between channel
members (including suppliers, intermediaries, third-party providers, and customers).
In essence, SCM is the comprehensive integration of supply and demand inside and
outside the enterprise.
According to a research report of Tsinghua University, supply chain management
(SCM) refers to the planning, coordination, operation, control and optimization of
logistics (material flow), commercial flow, information flow and capital flow (collec-
tively called “four flows”) in the network composed of suppliers, manufacturers,
distributors, retailers and customers. The main purpose of integrated management is
to connect all enterprises in the supply chain, so that their shared functions of procure-
ment, production and sales can be developed in a coordinated manner and the whole
Fig. 1.4 Relationship between supply chain management and supply chain finance. Source Report
on Blockchain and Supply Chain Finance 2019, Tsinghua University
supply chain can become an organic whole, thus improving the quality of products
or services, increasing customer satisfaction and reducing related costs. Activities
in the supply chain include: order processing, raw material and articles-in-process
storage, production planning, operation sequencing, goods transportation, product
inventory, customer service, etc. Therefore, the competition between enterprises in
the industry has gradually changed to the competition between supply chains (See
Fig. 1.4).
The capital flow is the blood of an enterprise, and the condition of the enterprise’s
capital flow will determine the fate of the enterprise. Since the expenditure and
income of enterprise funds often occur at different time which results in cash flow
gaps during the operation of the enterprise. In the case of a single production cycle of
a production enterprise, the financing needs may occur at the same time as an order
is accepted, because the advance payment for raw materials required under the order
is likely to exceed the enterprise’s own funds. In the subsequent production phase,
the enterprise generates input inventories, such as raw materials, on one hand, and
inventories of semi-finished and finished goods on the other hand. At the same time,
the enterprise also needs to settle payments to suppliers of raw materials and other
goods, and the capital demand continues to rise and reaches the peak of the entire
cycle. Next, the enterprise starts to deliver goods downstream, generating accounts
receivable. As the accounts receivable flow back, the capital demand of the enterprise
Fig. 1.5 A large number of financial activities in the links of supply chain operation. Source Report
on Block-chain and Supply Chain Finance 2019, Tsinghua University
also falls back. In the supply chain, the different strengths of enterprises lead them
to be not on a completely equal footing in the transaction process, and the cash flow
gaps of the disadvantaged SMEs has their own characteristics. Modern supply chain
is a complex operation and management process, almost every link of supply chain
operation will be accompanied by a large number of financial activities, so supply
chain finance comes into being (Fig. 1.5).

According to Hofmann (2005), supply chain finance is located at the intersection of
logistics, supply chain management, collaboration, and finance, and it is a way for
two or more organizations, including external service providers, in the same supply
chain to work together to create value by planning, executing, and controlling the
flow of financial resources between organizations.
Supply chain finance is at the forefront of financial services related to the supply
chain cycle. These services are mainly provided by financial institutions and are
based on documents, orders and contracts traded between companies, giving these
companies better payment terms, generating liquidity in the form of cheaper financing
and enhancing their working capital.
Supply chain finance is at the forefront of financial services related to the supply
chain cycle. These services are mainly provided by financial institutions and based
on trading documents, orders and contracts between companies, which gives these
companies better payment terms, generates liquidity in the form of cheaper financing
and enhances their working capital (Fig. 1.6).
Logistics provider
Fig. 1.6 Supply chain finance methods. Source Hofmann (2005)
According to the criteria of the Global Supply Chain Finance Forum, it is important
to understand the relationship between the physical supply chain and the financial
supply chain in order to illustrate the role of supply chain finance.
A physical supply chain (PSC) is a system of organizations, people, activities,
information, and resources involved in the transfer of a product or service from a
seller to a buyer, which may occur within or across national borders. Physical supply
chain activities convert natural resources, raw materials and components into semi-
finished or finished products for delivery to end customers. It is the potential basis
for generating financial demand and the economic functions supported by financial
supply chain activities. Physical supply chain management refers to the management
activities covered in managing the physical supply chain.
A financial supply chain (FSC) is a chain of financial processes, events and
activities that provide financial support to participants in the physical supply chain.
FSC management refers to a range of corporate management practices and trans-
actions that enable the purchase, sale and payment of goods or services, such as
defining contractual frameworks, sending orders and invoices, matching incoming
and outgoing shipments, monitoring activities such as cash recovery, developing
supporting technologies, managing liquidity and working capital, using risk mitiga-
tion measures such as insurance and guarantees, and managing payments and cash
flow. FSC management encompasses the collaboration of a range of contributors that
meet the needs of the financial supply chain, such as internal company functions,
trading parties, and service providers in the area of supply chain automation and the
full spectrum of financial services. Supply chain finance is a cluster of services that
support the financial supply chain.
According to the criteria of the Global Supply Chain Finance Forum, supply chain
finance can be defined according to the following framework illustrated by Fig. 1.7:
Fig. 1.7 Supply chain finance methods. Source EBA Market Guide on Supply Chain Finance—
2014
According to the criteria of the Global Supply Chain Finance Forum, supply chain
finance is defined as the optimal management of working capital and liquidity placed
into supply chain processes and transactions using financing and risk mitigation
measures and techniques. Supply chain finance is typically used for open account
transactions triggered by supply chain activities. Visibility of the trade flows to the
financing provider is a necessary element of this financing arrangement, and this can
be achieved through a technology platform.
Through this definition, we can find several key points of supply chain finance.
Combination supply chain finance refers to a combination of financial and
risk mitigation techniques and practices that support the flow of trade and capital
throughout the supply and distribution chain of domestic and international end-to-
end operations. It emphasizes a “holistic” concept that encompasses a wide range of
created and developing financing and risk management techniques.
Credit supply chain finance is often (but not only) applied to open account trans-
actions. An open account transaction is a transaction between a buyer and a seller
that is not supported by any bank credit instrument or documentary trade instrument
issued by the buyer or seller, and the buyer is directly responsible for the payment
associated with the underlying transaction. When parties to a transaction supply or
purchase goods or services based on open account terms, the goods or services are
typically invoiced and the buyer makes payment within an agreed time frame. Open
account terms can be contrasted with trade based on prepayment transactions, or that
using payment protection instruments such as letters of credit.
Parties Parties to supply chain finance transactions, including buyers and sellers
who trade and collaborate with each other upstream and downstream in the supply
chain. These parties work with finance providers to raise funds based on demand,
using various supply chain finance techniques and other forms of financing. Based on
their commercial and financial strength, the parties, especially the “core” enterprises,
often set goals to improve supply chain stability, liquidity, financial performance, risk
management and balance sheet optimization.
Event-driven Finance providers serve financial needs based on orders, invoices,
receivables, other claims and related pre- and post-shipment financial needs in the
supply chain. Therefore, supply chain finance is largely “event driven”. Each inter-
vention (financing, risk mitigation or payment) in the financial supply chain is driven
by an event or trigger condition in the physical supply chain. The development of
advanced technology and business processes for tracking and controlling events in
the physical supply chain creates the opportunity to automatically trigger supply
chain finance interventions in the relevant financial supply chain.
Development and flexibility supply chain finance is not a static concept, but an
evolving set of practical activities using various technologies or a combination of
them. Some of these technologies are mature, while others are nascent or cutting-
edge, or variations of existing technologies, and may include the use of traditional
trade finance. These technologies are often used in combination with each other or
with other financial and physical supply chain services.
1.3.4 Development History of Supply Chain Finance
The supply chain finance is increasingly platform-based and will develop towards
intelligence. The main feature of supply chain 1.0 is the centralized model, focusing
on one core enterprise while providing financing services for multiple enterprises
in the supply chain at the same time, to improve the ability of synergistic operation
among enterprises. Supply chain finance 2.0 integrates logistics, information flow and
capital flow, adopts an online mode, and reduces the influence of the “bullwhip effect”
through informationization. With the development and application of internet tech-
nology, supply chain finance has entered the stage of 3.0, and increasingly platform-
based, mainly solving the problems of information asymmetry and lack of config-
uration. Currently, supply chain finance is entering an intelligent 4.0 stage, and the
business model tends to be real-time, customized and small-valued, with data pledge
as the innovative product model and full integration and sharing of information with
the help of artificial intelligence, block-chain and other technologies. Future financial
providers can pay more attention to customer experience and personalization from
various aspects such as product model and business process, financial services are
more intelligent, and the service is completely customer-centered (Table 1.6).
Table 1.6 Development stages of supply chain finance

Supply chain Supply chain Supply chain Supply chain
finance 1.0 finance 2.0 finance 3.0 finance 4.0
Key features Centralized On-line based Platform-based Digitized
Business Offline model of connecting Relying on highly
models traditional supply upstream and internet customized,
chain finance, downstream of technology to real-time, and
backed by the credit the supply chain create a decentralized for
of core enterprises and all parties three-dimensional each operational
involved through integrated service segment in highly
ERP to make the platform penetrated niche
overall service industry sectors
online based
Main Banks Banks Banks Banks
participants Supply chain Supply chain Supply chain
participants participants participants
Platform builders Platform builders
Internet finance
Technical Real estate Internet Cloud technology IoT, cloud
applications collateral and credit technology application computing,
evaluation Movable Data risk control block-chain, data
property pledge model pledge
Elements and Emphasizing on Increasing the Clear transaction Penetrating the
information tangible elements, attention to structures and entire
flow focusing on the use logistics and relationships, with management
of things in IoT, focusing on the a high degree of operation loop
with a focus on information of complexity in while clarifying
capital utilization each link in the information the transaction
and reimbursement supply chain sources and structure
presentation
Source Innovative Development Report on China Supply Chain Finance 2019 by Jing Data
1.3.5 Market Prospects of Supply Chain Finance
The market size of supply chain finance in China will reach 15.86 trillion in 2020
according to Jing Data. Under the policy environment of combining industry and
finance and moving away from the virtual to the real, supply chain finance, with its
strong support and empowering effect on the real economy, is rapidly becoming an
important grip to revitalize the real economy and promote industrial upgrading. At
present, the key player affecting the scale of China’s supply chain finance market
is core enterprises. Banks and non-bank financial institutions enter the field of
supply chain finance as financiers, and their business scenarios are mainly based
on accounts receivable financing, supplemented by inventory financing and prepay-
ment financing, providing financing services for upstream and downstream enter-
prises in the supply chain. Then, the market scale of the whole supply chain finance
industry is measured by taking the accounts receivable of listed enterprises involved
Reference 27
Fig. 1.8 China’s supply chain market size, 2016–2022. Source Innovative Development Report on
China Supply Chain Finance 2019 by Jing Data
in supply chain finance business in China as the entry point, and including the scale
of prepayment accounts and inventory assets of enterprises. Generally speaking, the
amount of accounts receivable financing or prepayment financing is 70–80% of the
total amount of accounts, and the amount of inventory financing is 30–50% of the
value of goods. Combining the three supply chain business scenarios of accounts
receivable, prepayment accounts and inventory of listed companies for calculation,
it can be seen that the market scale of China’s supply chain finance will reach 15.86
trillion in 2020. With the existing players and new entrants profoundlyy penetrating
the market, supply chain finance will usher in a period of rapid development in the
future, and is expected to reach a scale of 19.19 trillion in 2022 (Fig. 1.8).
Reference
Hofmann.: Supply chain finance: some conceptual insights. Beiträge Zu Beschaffung Und Logistik,
203–214 (2005)
Chapter 2
Model of Credit Empowerment
Through the introduction in Chap. 1, we have learned that great enterprises are able
to create value on a sustainable basis, and that competition among enterprises will
escalate to competition in the supply chain. Great enterprises must have excellent
supply chains, but the challenge of difficult and expensive financing for the SMEs on
the chain can make it difficult for the core enterprises to be impervious, and supply
chain finance is an effective solution. What does the supply chain finance ecosystem
look like? Who are the key players? How do credit intermediaries empower SMEs
with credit? What are the models of credit empowerment? Which models are most
worthy of our attention? This chapter will discuss those questions.
2.1 Supply Chain Finance Ecosystem
In order to explore the model of supply chain in credit empowerment, we first need
to understand the current situation of the supply chain finance ecosystem and the
connection between various participants. Supply chain finance usually requires the
collaborated advancement of multiple participants, and each participant/stakeholder
then jointly constitutes the ecosystem of supply chain finance. The analysis of the
ecosystem can fully grasp the system composition, function positioning and foreseen
future trend of supply chain finance.
2.1.1 Panorama of Supply Chain Finance Ecosystem
Looking at the industry from a global perspective, it is not difficult to find that supply
chain finance is a kind of eco-collaborative financial business. In other words, the
operation of each supply chain finance business requires the collaboration of at least
three roles, including the demand side of funds, the extractor of risk information and

https://doi.org/10.1007/978-981-19-3513-8_2
30 2 Model of Credit Empowerment
the provider of funds. Therefore, in the process of supply chain finance business,
all supply chain finance stakeholders together constitute the business ecosystem of
supply chain finance. The ecosystem of supply chain finance includes eight major
participants: demand side of supply chain finance, core enterprises in the supply
chain, service providers of supply chain finance platforms, providers of supply
chain finance technology services, supply chain finance institutions, supply chain
finance infrastructure, industry associations and regulators. In addition to the demand
side and the infrastructure providers, other participants act in one or more roles of
customer resource aggregator, risk signal extractor, and capital provider to varying
degrees.
We can outline the supply chain finance ecosystem roughly as Fig. 2.1.
(1) Financiers, mainly financial institutions such as banks, inject liquidity into the
supply chain finance ecosystem;
(2) Core enterprises in the supply chain, upstream and downstream enterprises at
all levels (mainly SMEs), logistics undertakers, and e-commerce platforms,
together constitute the system of production and operation cores in the supply
chain;
(3) Supply chain management service enterprises, financial technology service
providers, and supply chain infrastructure enterprises are responsible for
providing various supply chain services to enterprises in the chain.
Fig. 2.1 Overview of supply chain finance ecosystem. Source Innovative Development Report on
China Supply Chain Finance 2019 by Jing Data
2.1 Supply Chain Finance Ecosystem 31
Fig. 2.2 Ecological function roles of supply chain finance platform. Source Innovative Develop-
ment Report on China Supply Chain Finance 2019 by Jing Data
(4) Regulators and industry associations are important environmental factors of the
supply chain finance ecosystem and they play a supervisory and guiding role in
the ecology and provide corresponding industry norms.
At present, China supply chain finance has developed to a platform-based stage.

According to the responsibilities and functions assumed by each relevant participant
in the ecosystem, the ecological functions of the platform are specifically shown in
the following Fig. 2.2.
The transaction party, platform provider, risk manager, and liquidity provider
constitute the four main roles of the supply chain finance service ecology at the
platform-based stage, and the environmental influencer is an important related party.
Trading parties specifically refers to the two or more parties that transact in the
supply chain system because of the occurrence of specific business. However, in
the supply chain network, the status of multiple parties trading with each other is
not equal. Because of the differences in the volume, links and nature of enterprises,
some enterprises have formed a stronger position, and even a buyer’s monopoly or
seller’s monopoly. Based on their strong position, these enterprises have very high
bargaining and pricing power. By virtue of their position, they will continuously
take up the funds of other enterprises in the supply chain and extend the payment
period to ensure their own cash flow is sufficient, while their counterparties often
obtain various types of non-cash assets such as accounts receivable and prepayment.
Because of the lack of access to cash assets and their own need for working capital,
these relatively disadvantaged companies are often short of funds, creating a huge
demand for short-term financing. Therefore, the disadvantaged enterprises in the
supply chain, often also SMEs, become the demand side for funds in the supply
chain ecosystem.
The platform provider, as the name suggests, builds a platform to provide a place
for the various trading parties in the supply chain finance ecosystem to trade with
each other, connecting the trading parties and the liquidity provider. A platform
provider has two very important basic responsibilities: firstly, it can accurately handle
all kinds of data, information and materials after effective integration and form a
targeted decision-making basis for all parties; secondly, it can effectively establish
and maintain the cooperative relationship between all parties, form a reasonable and
fair method of benefit distribution, and continuously attract all parties to participate
in platform activities.
The main responsibility of the risk manager is to prevent and control various risks
that may be released by financing in the supply chain finance ecology. Therefore,
the risk manager must have access to the data of the parties’ transactions provided
by the platform provider, and be able to effectively detect and monitor the statuses
and behaviors of the parties based on their qualifications and transactions.
The liquidity provider, generally known as the capital provider, is usually a finan-
cial institution such as a bank, so its most basic function is to provide funds to the
demand side of the supply chain finance ecosystem. However, providing funds is
not all of its responsibilities and functions. In the current supply chain ecosystem,
liquidity providers usually need to provide not only funds, but also a variety of
financial services such as asset management, finance and investment, etc. To be
more precise, liquidity providers provide a whole set of financial solutions including
various necessary financial services. At the same time, liquidity provider themselves
should also have strong risk management capabilities, as they are the risk bearers
of liquidity. Therefore, liquidity providers should be able to provide targeted and
personalized financial solutions or products according to the needs and risk profile
of various customers.
The institutional and technological environment in which the supply chain finance
ecosystem is embedded greatly shapes its form, so environmental influencers are an
extremely important external player. The two main types of organizations that can
influence the institutional environment are regulators and industry associations. The
development of intelligent technology has rapidly transformed the environment in
which the supply chain finance ecosystem is located, and the organizations that
can influence the technological environment, such as research institutions, colleges,
infrastructure providers, fintech companies and data companies, etc., are even more
complicated,
The above mentioned four major players and one external environment influ-
encer are divided from the perspective of their respective responsibilities and func-
tions. However, in actual business, a specific enterprise or organization may assume
several different roles at the same time because of the different resources and capa-
bilities it possesses. For example, in the supply chain finance platform ecology led
by the core enterprises, the core enterprises may be both the participants of trans-
actions, the builders and providers of the platform, as well as the risk managers by
virtue of their advantages in information and knowledge in the industry, forming and
outputting their own risk control capabilities; they may also set up their own financial
subsidiaries to play the role of liquidity providers, and we will talk more about this
model later.
As one of the core roles of the supply chain finance ecosystem, the supply chain
finance platform ecology established and developed by the platform provider will
show great differences in the resources it can attract, specific business models, prod-
ucts and risk control due to the different resources and capabilities of the participant
acting as the platform provider and its position in the industry chain. Therefore, in
the rest of the article, we will focus on the construction capacity structure of supply
chain finance platform and the type of supply chain finance platform in the specific
analysis.
2.1.2 Deconstruction of Capability of Supply Chain Finance

Platform
Supply chain finance is a financial behavior based on industrial supply chain manage-
ment, which essentially relies on supply chain operation to carry out financial busi-
ness, and at the same time, with the help of fintech, accelerates the efficiency of
the entire supply chain capital flow in combination with financial business innova-
tion and management, promotes the development of the industrial supply chain and
improves the overall efficiency and competitiveness of the industrial supply chain.
This understanding contains several layers of connotation:
(1) Differences in basic environment. Supply chain finance is based on industrial
supply chain operation and management. The level of industrial supply chain
operation and management, the degree of digitization of existing industrial
supply chain, the degree of difficulty and cost of future digitization will have an
important impact on the supply chain finance of the industry, which is the basic
environment for the development of supply chain finance.
(2) Differences in scenario demand. Financial activities are carried out for the
specific business of the industrial supply chain, and the specific business of
different links of different industries and different types of participants will
have different pain points and value propositions for financial services.
(3) Service expansion and innovation. The purpose of supply chain finance is to
optimize the cash flow of the whole industry, so that all parties in interest
can achieve more efficient production and operation with lower cost. There-
fore, supply chain finance is not only the most common financing and lending
services we have in practice at present, but also should include broader financial
services and their combinations. This is also the foothold for banks and other
financial institutions involved in the supply chain finance business to use their
own advantages to achieve product and management innovation.
(4) Practice intertwining and association. Efficient supply chain financial services
can promote a virtuous cycle with operation and management industrial supply
chain, not only solving the capital problem, but also helping to improve the
overall competitiveness of industrial supply chain, which are closely related to
each other at the practical level and can’t be viewed separately.
(5) Premise of technological advancement. The platform-based development of

supply chain finance is a product of advancement by financial technology.
Moving forward further to the intelligent progression is inseparable from the
effective use of financial technology and innovation. However, the premise of
cloud computing, big data, artificial intelligence, block-chain and most other
technologies is digitization. The digitization of business activities in specific
scenarios is the data basis of big data, artificial intelligence, etc. For supply
chain finance, in the promotion of the digitization of industrial supply chain
participants, to figure out who bears the cost of industrial digitization is the
first issue to be considered. Otherwise, supply chain finance will not be able to
break away from the original business limitations of traditional finance relying
on financial information, real estate mortgage and guarantee of participants.
Based on the above business level interpretation of supply chain finance, this report
sorts out and summarizes the capability architecture of supply chain finance platform
construction, as shown in Fig. 2.3. It is worth noting that: (1) These capabilities can
be the platform provider’s own strengths, or the platform provider can integrate
capabilities from partner resources that can be leveraged to the platform. (2) This
is a relatively ideal and a complete framework of capability system. On one hand,
this means that, under the realistic consideration of technology and cost economy,
the practitioners may not have all the capabilities in practice, but they can take a
certain point as an entry point to start business first, and then grow and improve
gradually in the process of exploration. For example, at present, many financial
institutions have chosen to build the accounts receivable chain notes platform first. On
the other hand, it also means that if an enterprise has a relatively complete capability
system for building a supply chain finance platform, most of these capabilities can
be migrated, and the most typical basic functional layer of business digitization
capability, data cleaning and integration capability, and technical security capability
can help enterprises gain advantages in other digitization-based financial services,
such as the business of building data platforms for small and micro enterprises.
Basic Function Layer

The basic functional layer mainly emphasizes the effective realization of business
digitization and information integration in the industrial supply chain at the tech-
nical level. The basic function layer generally includes four kinds of capabilities, as
follows:
(1) Industry scenario deconstruction capability
Since the supply chain finance platform needs to provide information and integration
services for all industry chain members, it needs to understand the business struc-
ture, business characteristics, business processes and business risks of industry chain
members, including but not limited to the distribution of technology research and
development, material procurement, production, distribution and logistics, various
services of the whole supply chain, and the correlation and linkage characteristics
among them and thus we can further grasp the characteristics of the flow of funds
Fig. 2.3 Construction capacity architecture of supply chain finance platform. Source Innovative
Development Report on China Supply Chain Finance 2019 by Tongdun Technology
in specific business links, and the demands and pain points of each interested party.
This is the prerequisite for helping various industry chain members to digitize their
related businesses effectively.
(2) Business digitization capability

It is essential to realize the digitization of business based on the deconstruction of
industry-specific business scenarios. This capability emphasizes several aspects: (a)
whether the information of key business nodes is truly and effectively reflected to
the platform data level; (b) whether the cost of realizing this digitization, including
time cost and money cost, can be controlled within an economically feasible range.
(3) Data cleaning and integration capability
Data integration, cleaning and consolidation are important prerequisites for analyzing
data from the business level and providing support for intelligent decision-making.
(4) Technical security capability
Technical security capability refers to the platform’s technical stability and ability
to prevent attacks. Technical security is the foundation of platform construction.
As for capabilities (1) (2) (3) of the basic function layer, the degree of effective
implementation of the former will affect the realization of the latter, and the stronger
and better realized the former capability is, the difficulty of realizing the latter will
be correspondingly reduced. Ultimately, several capabilities of the basic functional
layer need to achieve a balance of reliability, openness and standardization in terms

of the service characteristics shown to the public by the platform.
Reliability refers to the fact that the platform, as a place for the interaction of
various participants in supply chain finance, needs to have high standards and require-
ments in terms of system stability and platform technology security in order to gain
the trust of all participants and carry various functions on this basis.
Openness means that the platform should have an open system architecture design
to achieve flexible internal and external coordination, so that internal and external
members can use it to establish their own supply chain finance systems or modules,
thus realizing a comprehensive open ecology that connects all kinds of participants.
Standardization means that the platform needs to coordinate and integrate the
information systems of each member of the industrial supply chain, on the basis of
which it needs to be transformed into a unified and standard information format for
the next step of integration and utilization.
Business Service Layer

The business service layer mainly emphasizes the effective realization of efficient
flow of funds in the industrial supply chain at the level of financial services, so as
to promote the quality and efficiency of the industrial supply chain as a whole. The
business service layer generally includes the following four capabilities:
(1) Solution design capability

Solution design capability is to provide financial service solutions for all
parties in the industrial supply chain that are suitable for their specific business
scenarios. The solution design capability is firstly related to the platform’s ability
to deconstruct scenarios and to profoundly understand the business, process and
capital flow characteristics of the industrial supply chain; furthermore, it requires
the platform itself or the resource parties that can be integrated to have a rich
financial service product system in order to provide the possibility of diversified
choices for enterprise customers.
(2) Risk control management capability
Risk control management capability is to monitor and manage potential
risks in financial services based on the structured and unstructured information
integrated on the platform. The risk control management capability is closely
related to the following elements: (a) the relevance, authenticity and richness
of data information that the platform can obtain and integrate, the analysis and
modeling, application and control of data, where the data information includes
not only the information of supply chain operation but also other informa-
tion of customer enterprises and related parties, such as: industry qualifica-
tions, historical violations, etc.; (b) the rational design of the business structure
related to the solution design, i.e., the use of various means or combinations
to resolve possible risks and uncertainties, including business closure, revenue
self-reimbursement orientation of the transaction process, and movable prop-
erty regulatory measures integrated with the business operation management
process; (c) the implicit industry cognition related to the depth of the supply
chain of the industry in which the specific customer enterprise is located, these
implicit cognition can help the platform break through the limitations of tradi-
tional financial information of enterprises and discover in advance some hidden
risk points that are highly related to the industry characteristics.
(3) Channel service capability
Channel service capability is the ability to communicate with customers
quickly and effectively through internet-based channels, and to provide good
terminal support and services.
(4) Business security capability
Business security capability refers to the account security, data security, service secu-
rity, etc. of relevant participants on the platform, which is the basis and guarantee
for the smooth development of business. The various capabilities of the business
service layer are related and to a certain extent affect each other, and in terms of the
service characteristics of the platform as a whole, it is necessary to achieve pene-
trating adaptation, dynamic convenience and micro-service. (1) Penetrating adapta-
tion means that the design of financial products, on one hand, should penetrate into
the operation of the whole enterprise or even the industrial supply chain, and explore
the linkage needs of enterprises at each level of the whole industrial chain to form
industrial closure, so as to achieve penetrating adaptation of the industrial chain;
on the other hand, the financing, cash management, finance management, insurance
and other demands of a single enterprise at a node of the industrial supply chain
should be considered comprehensively, so as to achieve the industrial investment
adaptation of a single node by means of a comprehensive financial service solution.
(2) Dynamicity and fastness means that the supply chain finance platform needs
to quickly build timely risk control capabilities and customer interaction capabili-
ties. It includes: Dynamic risk control and credit strategy realize real-time update
and management of financing amounts, and bank account interface achieves timely
release of funds to accounts; Full online operation and interaction allows responding
quickly to the needs of corporate customers when their needs or conditions change.
(3) Micro-service refers to the supply chain finance platform needs to coordinate
with a variety of financial products from multiple financial institutions, to achieve
both differentiated penetrating adaptation as well as fast management and response.
The only way is to deconstruct the micro-service of financial products, standardize
the packaging, and then combine, design and output the penetrating adaptation in
specific scenarios.
Platform-based Supporting Infrastructure

The infrastructure framework of supply chain finance has been built on the basis
of the aforementioned eight capabilities, but the corresponding state and conditions
are needed to make the supply chain finance business really work effectively and
sustainably.
(1) Closed-loop means that the platform should strive to realize the closed-loop
business process of industrial supply chain.
(2) Visualization means that the platform should strive to realize the unification and
visualization of the four flows of information flow, business flow, material flow
and capital flow, enhance the trust between the participants and reduce the cost
of collaboration.
(3) Synergy, which refers to the synergy of all participants on the platform, neces-
sitates the establishment of the rules of collaborative operation of all parties,
including supporting positive incentives and negative penalties.
(4) Distribution refers to the need to establish a reasonable benefit distribution
mechanism among the participating parties on the platform.
2.1.3 Analysis of Types of Supply Chain Finance Platform
According to the different links of the supply chain finance platform ecology, this
report classifies the supply chain finance platform system into three major categories
of “two horizontal platforms and one vertical platforms”, as shown in Fig. 2.4.
Horizontal Industry Integration Platforms

Horizontal cross-industry platforms are platforms formed horizontally across
multiple industries. This category is generally formed under specific conditions and
can be divided into two types as follows:
The first major type of horizontal cross-industry platform is a horizontal cross-
industry platform formed based on the advantages of transaction or service informa-
tion. The dominant party of this type of platform is usually the transaction participant
Vertical Industry Platform

Horizontal cross-industry platform
Industry A Industry B Industry C Industry D Industry E Industry F
M1 Mn
M0
B1…Bn
B0
Consumer Horizontal cross-industry

Horizontal cross-industry platform platform based on the
based on the advantages of
advantages of regional
transaction or service information
Vertical industry platform integration
Fig. 2.4 System of supply chain finance platform types. Source Innovative Development Report on
China Supply Chain Finance 2019 by Tongdun Technology. Note M i represents represents upstream
suppliers of core manufacturing enterprises M 0, Bi represents downstream distributors of M0 , and
B0 represents integrated e-commerce platforms
in the entity industry chain or the productive service provider with which it has a
close relationship. The following types of supply chain finance platforms led by the
participating parties are common.
(1) Platforms led by B2C e-commerce enterprises, such as: supply chain financial
services launched by Jingdong and Suning;
(2) Platforms led by logistics enterprises or supply chain management service
companies. Here, the platform led by logistics enterprises or supply chain
management service companies mainly refers to the platform that relies on
the advantages of the industry customers it serves and provides supply chain
financial services for the industry in which the customers are located (platforms
that focus on providing supply chain financial services for the logistics industry
belong to the following vertical industry platforms). For example: External
Asia’s supply chain finance service platform;
(3) Information software service provider-led platform. For example: UFIDA’s
supply chain finance service platform.
For B2C e-commerce enterprises, their advantages as platform providers lie in
the following aspects:
(a) They have participated in the transaction link of the industrial supply chain,
and have certain industrial knowledge and industrial customer accumulation
(mainly for e-commerce with self-operating business);
(b) They have accumulated a large amount of industrial supply chain-related data
and information in the course of previous business development, locked the
payment and transaction on the platform, and promoted the informationization
of the associated links as the main force, which has also achieved to some extent
their industrial right of speech and influence.
(c) Many large e-commerce platforms have also further expanded their own ware-
housing and logistics systems, further enhanced the depth of interaction between
the platform and the industrial supply chain, and expanded the information
dimension and means of risk control supervision that can be integrated by the
platform. In short, for typical e-commerce enterprises like Alibaba, Jingdong,
Suning, stepping into the supply chain finance has become a rational choice as
their business develop to a certain stage. They also have advantages not available
to or reproducible by other platforms mainly because they have endeavored to
build up infrastructure of transactions, data and even warehousing and logistics
in the process of the development of e-commerce business.
For logistics enterprises or supply chain management service companies, their
main advantages lie in the industrial knowledge and industrial customer resources
accumulated through participation in customer transactions, as well as the advantages
of risk control and supervision related to logistics and warehousing.
For information software service providers, the most important advantage lies in
the digitization and data integration of various links of the industrial supply chain,
and the accumulation of and access to the customer resources of the enterprises
served.
The second major category of horizontal cross-industry platform is formed mainly

based on the advantages of regional industry integration. The common leading parties
are the local government, industry associations and other influential and credible
third parties, for example, the supply chain finance platform led by Ningbo Free
Trade Zone, the supply chain finance platform launched by the Internet Finance
Association, etc. The advantages of such platforms mainly lie in the synergistic
mechanism of the participants. The inclusion and promotion of the third party may
fully mobilize more resources in the region with the credibility of the third party
government or related organizations, such as coordinating the data related to various
public sectors within the jurisdiction; promulgating supporting positive or negative
incentives, such as financial incentives, tax concessions, industrial park concessions,
etc. within the jurisdiction of the local government, which will form a stronger driving
force for the potential participants.
Vertical Industry Platform

The vertical industry platform is a supply chain finance platform based on profound
development of a specific industry chain. The leading parties of this kind of platform
can be various, but the most common leading parties are core enterprises. Of course,
the leading parties can also be a financial institution such as a bank or a fintech
service company, which selects a specific industry to provide services with its capital
advantage or technical service advantage as the entry point, but in the process, they
will inevitably cooperate or contact with the core enterprises of the selected industry.
At the same time, the leading party can also be B2B e-commerce focused on specific
industries, and their advantage is the understanding of specific industries and the
accumulation of relevant transaction data.
The above division of types is only a rough division from the perspective of the
main integration links, the division method and the above situation discussed are not
complete, in practice, the specific participation in the platform built by participants
are more complex. For most of the participants with certain strength and advantages,
they want to dominate more or less. However, in practice, few enterprises can have
multiple resources and advantages of science and technology, information, capital
(or financial services) and industrial cognition at the same time. Meanwhile, due to
the different stages of development of supply chain finance and social technology, the
importance of different factors or the way they work will change at different stages
of the development of supply chain finance and social technology, the integration
scope of the platform itself will also be expanded or changed.
2.2 New Role of Supply Chain Finance Ecosystem—Credit Intermediaries 41
2.2 New Role of Supply Chain Finance Ecosystem—Credit

Intermediaries
2.2.1 Information Asymmetry
Information asymmetry in contract theory and economics refers to the situation in

which one party to a transaction has better or more information than the other. This
asymmetry make a transaction go wrong and in the worst case, can lead to a market
failure. There are several examples of this issue, including adverse selection, moral
hazard, and monopoly information asymmetry of knowledge. Regulations may not
be as effective as they should be because private firms know better than regula-
tors what they would do in the absence of regulations. Principal-agent issues are
studied in relation to information asymmetry, fundamental to every communication
process. In contrast to perfect information, information asymmetry is an impor-
tant tenet of neoclassical economics. In 2001 George Akerlof, Michael Spence, and
Joseph Stiglitz won the Nobel Prize in Economics for their “analysis of information
asymmetry markets”.
Information asymmetry model assumes that one party to the transaction has the
information that the other does not. It is also possible to have asymmetric information
models where at least one party can enforce or retaliate effectively against certain
parts of an agreement that are violated.
During adverse selection, the neglected party does not have access to information
about the agreed contract or agreement, whereas during moral hazard, the neglected
party is unaware of the performance of the agreement or the ability to retaliate against
a breach. A common example of adverse selection is that high-risk individuals are
more likely to buy insurance because insurers are unable to effectively discriminate
against them. This is usually due to an insufficient knowledge of different individuals’
risk, but can also be due to legal restrictions. Moral hazard refers to the fact that people
are more likely to behave recklessly after being insured, either because the insurer
is unable to monitor such behavior or because he or she cannot effectively retaliate
against such behavior, such as refusing to renew the policy.
Akerlof’s 1970 article Lemon Market, which brought the issue of information to
the forefront of economic theory, is the classic paper on adverse selection. The article
discussed signaling and screening as two main approaches.
Signaling
Signaling was introduced by Michael Spence. When information asymmetry exists,
he posited that people might be able to release their signals and thereby credibly
convey information to each other, resolving the asymmetry.
The idea of a matching job market was originally explored. Recruiters are looking
for employees with “learning skills”. Obviously, all prospective employees claim to
have “learning skills”, but only they know if they really do. This is information
asymmetry.
Spence suggests, for example, that college attendance is a reliable indicator of

learning ability. By completing college, skilled people demonstrate their skills to
future employers. If skilled people are more likely to complete college than unskilled
people, then they demonstrate their abilities to future employers. Whatever they
studied in college, no matter how much they learned, completing it shows they have
the capacity to learn. A college degree may however indicate that the individual is
able to pay for college, that he or she is willing to adhere to traditional values, or that
he or she is willing to submit to authority.
Screening
The screening theory was pioneered by Joseph E. Stiglitz. According to him,
an under-informed party can induce another party to reveal information. Under-
informed parties can proactively design a menu of options that cause others to make
decisions based on the other party’s private information. As an example, even though
the insurer does not know the risk profile of the insured, he can prevent fraud by
offering different types of insurance contracts that distinguish between insureds with
different risks and allow the insurance buyer to select between two types of insurance
methods, high deductible plus low premium and low deductible plus high premium,
to prevent fraud by the insured.
Sellers often have more information than buyers, including used car sales
personnel, mortgage brokers, stockbrokers, and real estate brokers.
Wills, life insurance, and sales of used art without a professional appraisal are
examples of situations where buyers generally have more information than sellers.
Kenneth J. Arrow first described them in an article on health care in 1963.
George Akerlof points out that in a market like the lemon market (also known as
the market for inferior products), the average price of goods tends to decline, even
those of very high quality. Unscrupulous sellers can take advantage of information
asymmetry by selling inferior products. Consequently, many people who don’t want
to be deceived will avoid certain kinds of purchases or won’t spend as much on a
particular purchase. Akerlof has shown that a market may even cease to exist.
SME financing is often challenged by information asymmetry, which makes it
difficult for banks and other financial institutions to understand both the real inten-
tions of the SMEs to use the funds and their future operations and development
prospects. As SMEs continue to struggle, they will need more funds, which can easily
result in adverse selection problems like those in the insurance market. Because of the
huge risks arising from information asymmetry, financial institutions are reluctant
to lend to SMEs.
2.2.2 Signaling Theory
In Contract Theory, signaling refers to the idea that one party (called the agent)
credibly communicates some information about itself to the other party (called
the subject). Although the Signaling Theory was originally developed by Michael
2.2 New Role of Supply Chain Finance Ecosystem—Credit Intermediaries 43
Spence based on the observed knowledge gap between organizations and prospective
employees, its intuitive nature has led to its application to many other fields such as
human resource management, business and financial markets.
In Michael Spence’s employment market signaling model, (potential) employees
send signals to employers about their level of competence by obtaining educational
credentials. The informational value of the credentials derives from a fact, that is to
say, employers perceive that the attainment of credential is positively correlated with
greater competency, and that employees with lower competency have more difficulty
obtaining credentials. Thus, the credentials allow employers to reliably distinguish
between low-competency and high-competency workers. The concept of signaling
also applies to competitive altruistic interactions in which the recipient has limited
competency.
Leland and Pyle (1977) analyzed the role of signaling in the IPO process. The
author points out that companies with good future prospects and a higher probability
of success (“good companies”) should always send a clear signal to the market when
they go public; the owners should control a significant percentage of the companies.
To be reliable, this signal must be costly and cannot be imitated by “bad companies”.
If no signal is sent to the market, information asymmetry will lead to adverse selection
in the IPO market.
As is the case in the employment market, there are bound to be highly competent
candidates without academic credentials, but employers have no way of selecting
them because they cannot signal their distinction from other, so hiring candidates
without academic credentials is extremely risky. Similarly, the inability of SMEs to
signal to financiers that they have a good future, and therefore to be known by lenders,
is also a fundamental reason for not being able to obtain financing. We can find
that effective information forms a signal, and the signal enhances credit, just as the
information of well-trained academics produces the signal of academic credentials,
and this signal enhances the credit that will have high competency. According to
this line of thought, the root cause of SME financing difficulties is the inability to
transform their information into a signal, and therefore they are unable to generate
credit. In the traditional model, this problem is insoluble, just like people with high
competency and no academic credentials cannot obtain the credentials immediately.
In the era of big data, this situation becomes possible, and information that was
otherwise unavailable can be obtained, and valuable information is filtered out from
the vast amount of information to form a signal, thus generating credit, that role that
undertakes the function of screening valid information to form a signal can be called
credit intermediaries, and credit intermediaries are able to be the diggers of credit
for SMEs.
2.2.3 Credit Intermediaries
It is not accurate to say that SMEs have difficulty in financing, but rather that good or
potential SMEs have difficulty in financing. The most critical factor here is that good
or potential SMEs cannot prove their excellence or potential to financial institutions,

and financial institutions have no way to understand them. According to information
asymmetry theory and signaling theory, in the absence of effective signals, the wisest
choice for financial institutions is not to lend to SMEs in order to avoid risks, but
with the advancement of technology, the emergence of effective signals has become
possible. If an institution can identify effective information through the business
behavior of SMEs and help SMEs send effective signals, or can help financial insti-
tutions fully understand SMEs, lending to SMEs is no longer a high-risk behavior.
This kind of institution that identifies information and generates signals can be called
a credit intermediary.
Credit intermediaries in the field of supply chain finance can discover, integrate
and screen information of SMEs in the chain, form effective signals, promote the
transmission of effective information between SMEs on the demand side of capital
and financial institutions on the supply side of capital, reduce information asymmetry,
and ultimately contribute to the formation of financial flows. Credit intermediaries
can discover the credit of SMEs, transmit credit, and facilitate SMEs’ access to
financial resources, promote the smooth operation of capital flow in the supply chain,
improve the performance of the whole supply chain, and create value in the industry.
This whole process can be seen as credit intermediaries’ credit empowerment for
SMEs by means of technology.
2.2.4 Capabilities Required for Credit Empowerment
In order to be able to undertake credit empowerment functions, credit interme-

diaries need to have the ability to turn information into signals, specifically, the
ability to identify information, refine information, transform information, and deliver
information.
Identifying information means capturing effective information in a huge amount
of information. In the era of big data, the recording and acquisition of information
is no longer a problem, but the explosive growth of information has also caused the
emergence of a large amount of redundant information, and the channels and sources
of information generation are also diverse and uneven. Truly valuable information
is like a pearl buried in the sand and needs to be painstakingly sifted through. Thus,
credit intermediaries must be able to sift through the sand for pearls to identify the
useful information from the large amount of invalid information, while also ensuring
the authority and validity of the sources and channels of information.
Filtering information means eliminating the invalid part of the useful information
that has been identified. The information that SMEs can generate and the information
that financial institutions need is definitely different, and even the information that
is diligently identified by the information intermediary still includes content that is
not meaningful to the demand side of information. Therefore, the second ability of
credit intermediaries is to fully understand the state of the parties of information
supply and information demand, so as to streamline effective information as much
2.3 Supply Chain Finance Models from Credit Empowerment Perspective 45
as possible, filter out the part that is not relevant, and make the effective information
more relevant.
Converting information is the process of converting information into the form
required by the demand side. In a sense, form conversion is a process of structuring
information. The information obtained by the credit intermediary from the SME is
still the original information from the perspective of the information provider after
identification and filtering, which requires the ability of the information intermediary
to structure the information in order to make it understandable to the demand side of
information with minimal effort.
Information transfer refers to the effective reaching of the converted structure
information to financial institutions. There is often more than one effective supplier
of funds, and the converted finished product information will only form real credit if it
is effectively delivered to the supplier of funds. Therefore, credit intermediaries also
need to have the ability and channels to communicate their converted information to
different financial institutions in a targeted and prioritized manner in order to finally
complete the whole process of converting the original information into credit.
In summary, we can find that being able to effectively achieve credit empowerment
often requires credit intermediaries to have strong technological capabilities and data
processing capabilities, so it is often professional fintech companies that play the role
of credit empowerment.
2.3 Supply Chain Finance Models from Credit

Empowerment Perspective
We have introduced the supply chain finance ecosystem and players, and described
the relationship between each player on the basis of previous analysis. In order to be
able to eliminate the information asymmetry between the supply and demand sides
of funds in supply chain finance, we introduce a new player crucial in the supply
chain finance ecosystem—credit intermediary. We find that credit intermediaries with
fintech attributes and the ability to identify, filter, transform and deliver information
can empower SMEs with credit, making new supply chain finance operations possible
and providing more SMEs with access to financial resources.
Credit intermediaries may not only necessarily exist alone in the supply chain
ecosystem, but also can be undertaken by other players in the supply chain ecosystem
with fintech capabilities. Based on this perspective of credit empowerment, four
different supply chain finance models can be formed depending on who takes on the
credit intermediary function.
2.3.1 Model 1 of Credit Empowerment: Independent Credit

Intermediary
In this model, core enterprises, demander of funds, financial institutions and credit
intermediaries are independent of each other, in particular, credit intermediaries are
completely independent.
Credit intermediaries find it very difficult to collect direct information because
they are not affiliated with any system. Those credit intermediary needs to have a
strong technical ability to penetrate into the underlying business of the industry supply
chain through other technical services or other services, and to profoundly understand
the characteristics and various technical needs of the industry in which the supply
chain of core enterprises and fund demanders are located. It may even be necessary to
assist core enterprises and demanders to digitally upgrade their supply chains, so that
their supply chain finance activities can be informatized, digitized and smartened, and
the recording and precipitation of information can be completed. Only on the basis
that information can be effectively recorded and preserved, credit intermediaries
may further promote the identification, screening, conversion and transmission of
information. In addition to being able to identify the credit of SMEs, such credit
intermediaries may also need to provide technical solutions that can appropriately
transfer the credit of core enterprises to SMEs and improve the credit of SMEs
through the transaction information, logistics information, capital transactions and
strategic relationships generated between core enterprises and SMEs in the supply
chain. In addition, such credit intermediaries must have relatively close cooperation
and communication with financial institutions, understand the needs of financial
institutions for industry-specific financial services, and also be able to meet the
requirements of banks for the rate of information transmission in financial activities.
There are many credit intermediaries that adopt this model, and ZeckFin is one
of them. Founded in 2015, the company focuses on the field of internet + industrial
finance, and provides customers with consulting planning on financial products and
business solutions, erection of online business platforms, online + offline business
operation support. It is the first pure financial technology company in China that
provides one-stop industrial financial services and does not engage in any financial
business itself.
The company mainly serves large listed companies, financial companies in the
system of central and local state-owned enterprises, and designs corresponding
supply chain finance products according to the characteristics and personality of the
industry to help them achieve various goals in business in the aspects of scale, cost
control, efficiency improvement and risk control. In addition, it also serves finan-
cial institutions beyond the industrial system. Targeted services include industrial
finance, ABS, etc. It can provide effective services in online supply chain finance
innovation for banks and enterprises, inclusive finance innovation, and ABS issuance
for online supply chain finance.
The company’s main products include three categories, namely receivables and
payables, ABS issuance and B2B payment. The receivables and payables cate-
gory mainly includes the receivables flow and financial instrument based financing,
empowered by block-chain technology with digital encryption, and the online
factoring instrument of cloud factoring. The main functions of the ABS issuance cate-
gory are to support one-stop asset collection, issuance, operation and management
for brokerage firms, law firms, factoring companies, core enterprises and suppliers.
The B2B payment category includes Rongyi Pay, a solution that provides individual
financing for B2B e-commerce and group buying, and Piaozhuanyi, a solution tool
that provides value-added for traditional bill pooling, circulation and financing.
Its main credit intermediary service is to provide fully customized online supply
chain finance—“senseless finance” system for each high-quality core enterprise and
to provide follow-up business operation services. Its own system helps enterprises
in the supply chain with financing needs to build and operate a “senseless finance”
platform that can cover the whole industry chain by interfacing with various internal
systems such as ERP, OA, WMS, SRM, etc., and interoperating with banks’ cash
management systems to control the cash flow of procurement payments, and at the
same time comparing and refining information with each other through third-party
platforms such as invoice verification, zhongdengwang.org.cn and enterprise risk
event inquiry. It helps enterprises in the supply chain with financing needs to build
and operate a “senseless finance” platform covering the whole industry chain.
2.3.2 Model 2 of Credit Empowerment: Financial Institutions

as Credit Intermediaries
In this model of credit empowerment, credit intermediaries no longer exist completely

independently, but are fintech companies owned by financial institutions that provide
funds or promote development.
There are two reasons for the emergence of this type of credit intermediary: one is
because some financial institutions, relying on their accumulation, precipitation and
processing experience of industry-wide financial behavior information, and taking
the lead in the field of fintech and transforming their financial advantages into tech-
nological advantages, have the ability to build a credit intermediary system that is
entirely suitable for them. Secondly, financial institutions have accumulated consid-
erable trust and strategic relationship with the core enterprises in the chain with
more historical business transactions, but they do not know much about the busi-
ness forms and information data of core enterprises and SMEs in the supply chain
system, and they cannot fully trust the core enterprises, and thus they must build their
own decision aid tool system. Through the construction of free credit intermediaries,
financial institutions can effectively accumulate information of upstream and down-
stream SMEs in the supply chain of core enterprises so as to form credit and expand
their own business in a low-risk state.
The difficulty faced by this model is that, as credit intermediaries are driven and
established by financial institutions, they must ensure a certain degree of generality,
and their understanding and grasp of industry characteristics are bound to be less
than lean. Furthermore, those credit intermediaries have an innate financial institution
perspective, which may result in biased understanding of the industry supply chain
and interest limitations. In addition, since credit intermediaries need to accumulate
data and train information screening capability in the internal information pool of
the industry supply chain where the core enterprises are located, convincing core
enterprises and SMEs and technically synchronizing their data platforms are issues
that must be addressed.
2.3.3 Model 3 of Credit Empowerment: Core Enterprises

as Credit Intermediaries
In this model of credit empowerment, credit intermediaries are also not completely
independent, but they are fintech companies owned or driven by the core enterprises
in the supply chain.
These credit intermediaries are generally large core enterprises or technology
platforms of group enterprises, which have accumulated various supply chain orga-
nization experiences and deposited a large amount of various data through other
supply chain technology services in the early stage, and since they are platforms
within the system, it is relatively easy to obtain data within the supply chain. This
type of credit intermediary has a close relationship with the supply chain and has the
natural advantage to undertake the task of transmitting effective signals to financial
institutions outside the system and empowering the supply chain system.
This type of credit intermediary faces three problems: first, how to be able to
persuade and coordinate various units within the system to effectively obtain data,
identify data and screen data. Second, because this type of credit intermediary and
the enterprises in the supply chain belong to the same system, and the customers
of financial institutions are also enterprises in the supply chain, there is a suspicion
of self-attestation of credit, and it is relatively difficult to obtain recognition from
financial institutions. The third is to balance the data privacy of enterprises in the
system and the data demand of financial institutions.
Haier Group (mainly focuses on its supply chain finance platform Hairongyi), for
example, is a typical representative of core enterprises as credit intermediaries.
Credit endorsement from strong core enterprises Haier Group is a world-renowned
leader in white household appliances, and according to the data of Euromonitor
Consulting, a world’s authoritative market research agency, Haier was the first in
global retail sales of large household appliance brands in 2018 and had ranked the
first for the 10th time. In 2018, Haier achieved a revenue of 183.3 billion yuan and
an annual net profit of 7.44 billion yuan. Based on Haier Group’s own main industry
of home appliances, the supply chain finance business of this industry is carried out,
which essentially injects Haier’s credit into the entire industry chain when handling
funds from financial institutions.
Wide range of customer resources from nodal enterprises Around Haier, its nodal
enterprises from upstream supplier system and downstream distributor system node
have become the customer resources within reach of its supply chain finance business.
In terms of its distributor system’s own channels alone, more than 8000 county-level
exclusive stores and 30,000 township outlets have been built nationwide by the end
of 2018.
Digitization of supply chain as the basis for leveraging supply chain finance busi-
ness Haier Group’s supply chain finance started from an online vertical B2B platform
(365rrs.com) that it built itself. Through this platform, Haier’s dealers nationwide
can conduct online procurement, payment, logistics and delivery, visualizing the
whole process and integrating four flows. At present, Haier has built a Jushanghui
system that covers 100% of its dealers, and its Yilihuo system has fully covered
township-level stores, realizing real-time control of dealers from order placement,
sales, inventory and after-sales.
Advantages of risk control of information data within the chain Based on the
digitization of the supply chain, Haier Group’s strong accumulation of data about its
own distribution channel networks, transaction data and logistics business and other
elements has become Haier Group’s hard-core element to carry out risk control for
its supply chain finance business. In essence, Haier has assumed the role of “system
integration” and to some extent “financial technology” in the process of cooperation
with financial institutions, and has fully opened up its internal order system, logistics
system, rebate system, master data system and other systems, and on this basis
coordinated with the systems and diversified services of financial institutions, to
screen and recommend customers according to the different requirements of different
financial institutions under the premise of protecting customers’ right to choose.
When Haier practices supply chain finance in its own industry, its original business
operation and management and supply chain finance scenarios are highly integrated,
providing numerous practical convenience and irreplaceable operational advantages.
(1) Marketing and pre-loan stage A whitelist system that require signatures by
Haier’s internal front-line sales personnel is implemented, although the signa-
tures do not have a legal effect, they contains the front-line sales personnel’s
knowledge of the customer’s hidden ability, which is an effective means of
customer screening in practice. The flow of funds is determined in combination
with the strategies of core enterprises. The amount of financing is determined
to match the sales strategy of core enterprises. Collaborative due diligence is
carried out by personnel of core enterprises. Haier’s front-line sales personnel
collaborate in due diligence, and identify due diligence resources and strategies
in a hierarchical manner. For example, no on-site due diligence is performed
for less than 500,000 yuan, and one is performed for more than 500,000 yuan.
(2) In-loan management Haier makes full use of its front-line business personnel
to carry out “incentive” soft data collection and “game task” post-loan visits,
and introduces more important implicit information dimensions to the original

business system in a timely manner.
(3) Automated early warning and intelligent collection, with more optional and
effective measures in collaboration with the main business According to the
changes in procurement, sales and inventory data, real-time warning is given to
assist intelligent collection and inventory control measures, and different corre-
sponding measures are taken for different types of customers. For customers
whose repayment habits are not good enough or whose income changes due to
promotion policies, they can be rewarded and punished to urge them to repay, or
even be matched with business consultants to help them cope with the situation
and achieve a win–win situation together. For customers involved in lawsuits,
cases and blacklisted customers, collection, legal proceedings and goods control
measures can be taken together.
(4) Relief-oriented collection for non-malicious customers For non-malicious
customers with unsatisfactory business data and unsatisfactory expected income
periods, it is advisable to combine industrial resources to assist them to relieve
their difficulties in collection. In general, they can control and assist at the same
time. In terms of control, they mainly adopt flexible control of goods, account
supervision and field monitoring by front-line personnel of core enterprises; in
terms of assistance, they can mainly assist in inventory processing, request for
promotional assistance and adjust to the repayment method of small amounts
in batches according to actual situations.
To sum up, based on the digital capability and capital resources of the supply chain,
core enterprises may become credit intermediaries to lead the supply chain finance
business of the industry with irreplaceable advantages, especially in the integration
of business operation management and supply chain finance scenarios.
However, it is worth noting that when the core enterprises attempt to expand their
service areas and export their business service capabilities of supply chain finance,
the aforementioned advantages will no longer exist, and the so-called business expe-
rience left may not necessarily be applicable to new industries, due to the natural
existence of industrial barriers in the field after all.
2.3.4 Model 4 of Credit Empowerment: Core Enterprise

System Has Both Functions of Credit Intermediaries
and Capital Providers
This model is the most integrated and special, and is generally what large group
enterprises strive to achieve, i.e. core enterprises, credit intermediaries and financiers
are all within the system, while there can be partial or no financial support from
external financial institutions, i.e. they are in a semi-sufficient or fully self-sufficient
state.
This type of model is often only possible for large conglomerates, especially state-
owned enterprises, where the core enterprise’s internal finance company or financial
institution provides some or all of the funds required by the SMEs in the system.
This also requires the core enterprise to have extremely strong resource capabilities,
specifically three ones: first, the business capability is extremely strong and the group
must have a huge enough supply chain system to undertake a huge enough supply
chain business; second, the technology capability is extremely strong and the group
has enough advanced and strong technical capabilities, and a relatively long practical
experience enough to become a credit intermediary. The level of technology of the
whole system is noticeably high, and a digitized or even a intelligentized system is
fully set up; third, the financial capability is extremely strong, and the enterprise needs
to have enough financial resources and, more importantly, corresponding financial
licenses and qualifications are necessary to ensure the demand of the whole system
for funds.
Those credit intermediaries are faced with two difficulties: on the one hand, all
activities are regulated and completed within the system, so many non-market behav-
iors may arise, resulting in increased comprehensive costs; on the other hand, from
the perspective of credit intermediaries, in order to complete the internal closed-loop
system where information and funds are from internal sources, they basically need
to give up the external market.
However, for large conglomerates, this type of model is the one that can best
enhance the interests of the group, as all resources and information run within the
group, ensuring operational efficiency and controllability. If they can build a credit
intermediary system and an industrial banking and financial system that are fully
compatible with the characteristics of their own industry based on their own business
and achieve complete self-sufficiency, it will be a feasible way for the group to
continue to grow and grow into a great enterprise. Especially, for the economic
system with Chinese characteristics, state-owned enterprises play a dominant role
and carry a historical mission of building great enterprises, this kind of model is
worthy of profound discussions and studies.
Chapter 3
Developement Stages of Credit
Empowerment
In the previous chapter, we analyzed the supply chain finance ecosystem and intro-
duced the role of credit intermediaries to illustrate the concept and four models
of credit empowerment through supply chain finance. Among the four models, the
model in which core enterprises, credit intermediaries and financiers are united or
within the same system is particularly suitable for large conglomerates. Under the
socialist economic system with Chinese characteristics, this model is a viable way
to help central state-owned enterprises, build great supply chains and create great
enterprises. In this chapter, we will look into the development of this model from
the perspective of large conglomerates. The completion state of this model is to
achieve complete self-sufficiency at the group level, and build a complete combina-
tion of industry, finance and technology within the group. However, this is still only
a direction of development and an ideal state, and a conglomerate needs to contin-
uously improve their business, technological and financial capabilities in order to
be successful. From the perspective of upgrading the group’s financial capability,
there are three stages to go through to realize the full integration of industry and
finance, that is, three stages for the group and the supply chain to gradually realize
full self-financing: “Credit sharing + supply chain finance”, “finance company +
supply chain finance” and “industrial bank + supply chain finance”.
3.1 Self-finance
3.1.1 Pecking Order Theory
According to the pecking order theory, the cost of financing for companies will
increase if the information is asymmetrical. A company can raise funds through
internal resources, debt, and new equity. Financing from within is usually the first
option, followed by borrowing, and raising equity is the last option. When internal
financing cannot be sustained, bonds are issued; shares are issued when more debt
https://doi.org/10.1007/978-981-19-3513-8_3
54 3 Developement Stages of Credit Empowerment
cannot be sustained. This suggests that there is an order to corporate financing.

An enterprise’s internal financing is advantageous when it is available, and debt is
preferred over equity when it is going to finance outside of itself. When equity is
issued, a new ownership structure is created. Debt, then, serves as a signal that an
enterprise requires external financing.
3.1.2 What Is Self-finance
According to Ning Xiaojun’s book Self-finance, self-finance is a comprehensive

financial information service provided by non-financial enterprises to their own
or business-related enterprises and individuals, including investment, financing,
payment settlement and value-added, relying on information technology to serve
their own main business and related industries. The so-called self-finance is relative
to other finance, and it means that the financial service subject and the object belong
to the same institution or group, and there is good sharing and commonality in data
and resources between them (Table 3.1).
As mentioned before, the competition of enterprises in the new era is no longer
the competition among individual enterprises, but the comprehensive competition
of supply chains, value networks and business ecosystems. Main enterprises and
conglomerates in the supply chain and business ecosystem should become a source
of finance in their own system and provide financial services for the enterprises in
the system, making its group, supply chain or business ecosystem more competitive.
From the viewpoint of the scope of services, there are two types of enterprise
self-financing, one is that the enterprise provides financing for itself, i.e. endogenous
Table 3.1 Difference between self-finance and ordinary finance

Comparison items Self-finance Ordinary finance
Business subject Non-financial enterprises Financial enterprises
Business purpose Serving their own main business and All industries
related industries
Service object Themselves or business-related enterprises All consumers and enterprises
or individuals
Consumers
Themselves or related enterprises
Supply chain upstream and downstream
enterprises
Employees
Business scope Investment Investment
Financing Financing
Payment and settlement Payment settlement
Value-added Value-added
Source Based on Ning Xiaojun’s Self Finance
3.1 Self-finance 55
financing; the other is the enterprise provides financial services for other associated
enterprises within the same group, supply chain, industry or business ecosystem.
The most important feature of self-finance is that the service providers are non-
financial enterprises in the system, and to a certain extent, the system is “self-
sufficient”. The difference between self-finance and traditional finance is mainly
reflected in the service provider, service purpose, service object, service scope and
other aspects. These many differences make self-finance a good complement to
traditional finance and open up new paths for financial services.
3.1.3 What Is Supply Chain Self-finance
SMEs in the supply chain normally need to get financial support from banks and other
financial institutions, which is exogenous finance, a financial resource provided by
enterprises outside the financial resource providers in the supply chain. Under the
model of ordinary finance, the core enterprises and SMEs in the supply chain obtain
funds entirely from exogenous institutions. The enterprises in the supply chain can
expand their financial capability and provide endogenous financial services to the
enterprises in the supply chain through licensed financial institutions such as factoring
companies that are internally owned, which expands the self-financing capability. We
believe that supply chain self-finance does not mean that the supply chain must rely
entirely on internal financing, as long as some of the funds needed by the enterprises
in the supply chain are financed through internal institutions, it can fall into the
category of supply chain self-finance.
We can draw some lessons from the pecking order theory. If the supply chain
is considered as a whole, the financing that can be generated internally faces less
information uncertainty, which makes it theoretically a lower cost financing method.
3.1.4 Development Stages of Conglomerate’s Supply Chain

Self-finance
The development of self-finance of conglomerates and supply chains is a gradual

process, in which conglomerates and supply chains need to continuously improve
their financial capabilities, promote the combination of industry and finance, and
gradually realize a self-finance system with a higher degree of self-survival. These
three stages are exogenous supply chain finance, finance companies + supply chain
finance and industrial banks + supply chain finance in order (Table 3.2).
Table 3.2 Three development stages of supply chain self-finance

Credit sharing + supply Finance companies + Industrial banks +
chain finance supply chain finance supply chain finance
Financiers External financial Mainly finance Industrial banks
institutions companies There may be external
Credit sharing among External financial financial institutions
core enterprises institutions not paid
Model features Core enterprises share Providing Establishment of
credit to the whole comprehensive financial specialized banks with
supply chain through services for the whole industry as the boundary
digital claim credentials supply chain in a
quasi-banking mode
based on finance
companies
Source Based on Supply Chain Finance 5.0: Self Finance + Block-chain Bills by Duan Weichang
and Liang Chaojie
3.2 Credit Sharing + Supply Chain Finance
The first step towards endogenous finance in supply chain finance is to maxi-
mize the use of internal credit, with core enterprises in the supply chain providing
credit through guarantees and repurchases, and upstream and downstream enterprises
obtaining financing from financial institutions by providing transaction records and
pledging movable assets such as receivables, prepayments and inventories. However,
there are many problems with the traditional supply chain model, which makes the
scope and effectiveness of shared credit very limited.
3.2.1 Problems Faced by Supply Chain Finance in Credit

Sharing
At present, there are many problems in supply chain finance that need to be solved:
Firstly, enterprises at the end of the supply chain still face difficulties in financing.
The accounts receivable or prepaid accounts of the first-tier distributors and first-tier
suppliers of the core enterprises are closely linked to the core enterprises’ own busi-
ness, but it is difficult to transmit the credit qualifications of the core enterprises to the
next level of the supply chain; secondly, it is costly for banks to determine the cred-
itworthiness of enterprises. Banks need to strictly verify the transaction information,
reliability of pledges and ability to control repayment of the target of financing, and
they need to reconcile the relevant information with the counterparty enterprises,
as well as to identify information forgery, such as forged warehouse receipts for
loan fraud, which is a problem of mismatch between benefits and costs for banks.
3.2 Credit Sharing + Supply Chain Finance 57
Thirdly, it is difficult to unveil more value from a supply chain management perspec-
tive. Traditional supply chain financial services are mainly devoted to the verification
of financial information of related enterprises and the measurement of financing risks
and returns, and are less involved in the supply chain optimization management of
core enterprises.
3.2.2 Barriers to Credit Re-transmission
In the current supply chain finance scheme, core enterprises can easily share credit
with their direct partners, but credit cannot be passed on to tier-2 partners and beyond.
In practice, the higher the tier, the more difficult it is for SMEs near the end to access
financial resources. While trading relationships in supply chains are transmitted in
a chained manner, credit cannot be simply re-transmitted, which leaves the core
enterprises with very limited scope for credit sharing, and the multi-tier suppliers
that really need credit sharing cannot have their demand satisfied.
There are three reasons for this phenomenon: Firstly, multi-tier partners do not
deal directly with the core business, therefore they do not enjoy the same level of
trust and transaction information is less valuable to financial institutions than that of
first-tier partners; secondly, the higher the tier, the more nuanced, fragmented and
less structured the transaction relationship is and the higher the cost of processing
information; thirdly, there is a lack of effective tools to transmit the credit of the core
enterprises from one tier to another, which is also a key reason.
3.2.3 Tools for Credit Re-transmission: Digital Debt

Instruments
If we want to build credit empowerment across the supply chain, we need to find
tools to support the credit re-transmission of core enterprises, so that credit can be
gradually transmitted to and to empower SMEs at the end of the supply chain.
In order to achieve free credit re-transmission, the assets or claims behind the
credit must be tokenized, specifically three problems have to be solved: Firstly, the
assets with credit must be digitized, as assets that are not digitized are difficult to
meet the requirements of transaction speed, and there are also relatively high costs
of verification; secondly, digital credit assets must be able to gain consensus trust
within the supply chain, while assets without consensus will inevitably be blocked
in circulation and difficult to circulate throughout the chain; thirdly, digital credit
assets with consensus must be able to be split, transmitted and financed freely, because
different enterprises in the chain have different requirements for the amount of assets,
and assets that cannot be split, even if they are digitized and have achieved consensus,
will still find it difficult to meet the requirements of all enterprises and cannot be
circulated freely. In short, in order for credit to be re-transmitted, instruments must

be digitized, consensual and splittable.
Digitization and consensus rely on technology, particularly the latest block-chain
technology, which is unforgeable, fully traceable, open and transparent, and collec-
tively consensual. In addition to the technical basis for credit splitting, there must
also be a legal basis for the transferability of credit transmission instruments, which
can be exercised without causation.
There is a good legal basis for digital debt instruments. Article 79 of the Contract
Law of the People’s Republic of China stipulates that a creditor may assign all or
part of its contractual rights to a third party. Based on block-chain technology, it
is possible to build a credential based on the creditor-debtor relationship between
the core enterprise members and their underlying contract counter-parties arising
from the underlying transactions. If the transaction relationship between the core
enterprise members and their underlying counter-parties is real and legal, and the
relevant underlying contracts are real, legal and valid, then the underlying contracts
corresponding to the digital debt credential are recognized and protected by Chinese
law, and the creditor-debt relationship corresponding to the digital debt credential are
also recognized and protected by Chinese law, so that credit re-transmission can be
effectively realized. The technical and legal foundations of digital debt instruments
will be discussed in detail in the next chapter.
3.3 Finance Companies + Supply Chain Finance
3.3.1 Significance of a group’s Finance Company
The essence of a group’s finance company is a capital management model.

According to the “Measures for the Administration of Groups” of the China
Banking Regulatory Commission, a group’s finance company is a non-bank finan-
cial institution that provides fund management and services to group members for the
purpose of strengthening the centralized management of group funds and improving
the efficiency of the use of group funds. Compared with the traditional methods of
fund collection and cooperation with external financial institutions, finance compa-
nies are an advanced stage of fund management for groups. There are two models of
fund management in finance companies: one is centralized management, where funds
are mostly centralized and dispatched; the other is decentralized management, where
the group is moderately decentralized to its core subsidiaries, and the investment and
financing activities of its subsidiaries are still highly dependent on the group. There-
fore, the difference in the management model of the group plays a decisive role in the
choice of the its capital management mode. With the expansion of the group’s scale
and the increase of the hierarchy, the previous capital management model is difficult
3.3 Finance Companies + Supply Chain Finance 59
to meet the differentiated needs of subsidiaries, and as a result, finance companies are
increasingly favoured by groups as an advanced form of capital management mode.
Functions of the Group’s Finance Company

The three core functions of the group’s finance company are to enhance efficiency,
reduce costs and strengthen risk control. The finance company has both a financial
license and an independent legal personality, which means that in addition to the
basic “deposit, loan and settlement” business, the finance company can also carry
out financial leasing and underwriting of bonds in the monetary market or capital
market, and its scope of services far exceeds that of traditional capital management.
The independent legal personality indicates that the finance company is no longer
subordinate to a functional department of the conglomerate, and the centralization of
funds does not depend entirely on the administrative compulsion of the conglomerate.
Based on the above two characteristics, the finance company has the following
advantages in the control and coordination of funds:
Allocation of funds among subsidiaries and reduction of the deposition of
funds: There are many subsidiaries in the conglomerate, with heterogeneity in terms
of industry and geographical distribution, and deposits of the parent company and
subsidiaries are scattered in different banks. Although the size of individual accounts
is limited, when aggregated to the group level, the amount of funds is considerable.
Once such funds are deposited, the efficiency of the group’s capital use will be
reduced. On the other hand, each enterprise in the group has different preferences
for the size and maturity of funds. There are subsidiaries that have good projects
but are short of funds to implement them, and there are also subsidiaries that have
relatively abundant funds but lack investment channels. As a capital allocation hub,
the finance company firstly pools the idle funds of members and then distributes them
to the enterprises in need of funds within the conglomerate, effectively reducing the
deposit of funds and improving the efficiency of fund use.
Accelerated up capital turnover and reduced cost of fund use: The finance
company cannot only improve the efficiency of fund use, but also reduce the cost
of funds from two aspects. On the one hand, the group’s internal enterprises have
frequent business transactions and high requirements for internal settlement, so the
finance company adopts an internal account system, which can save a lot of financial
charges due to the fast flow of funds. On the other hand, it offers the lowest possible
interest rates for loans to internal enterprises, so as to reduce the interest expenses on
loans and reduce external capital transactions. In 2014 and 2015, the industry-wide
average lending rates of finance companies (208 companies in the sample) were
5.43% and 4.88% respectively, lower than the loan rates of financial institutions in
the same period, which is related to the continued implementation of preferential
loan rates by finance companies. Of course, for risk prevention reasons, finance
companies are constrained by their own capital scale in lending.
Strengthen the group’s capital risk control: Firstly, through the unified collec-
tion, operation, allocation and management of the finance company, the inflow and
outflow of funds of the member units are controlled, and the group can obtain the
right to know the major financial matters of the subordinate units and ensure the safe
operation of funds. Secondly, the clients of the finance company are limited to the
group, and they are in frequent contact with the member units, so they can provide
financial services and analyse the financial situation and operating results of the
subordinate units. Therefore, from the business point of view, the group authorises
the finance company to supervise the settlement and payment of funds of member
units, which can effectively prevent and control the capital risks of the group.
Legal Relationship Between the Finance Company and the Parent Company
The finance company and the parent company are both independent legal enti-
ties. The finance company is subordinate to the conglomerate, under the direct lead-
ership of the group and subject to the supervision and management of external insti-
tutions such as the CBIRC, as an corporate legal person with independent accounting,
sole responsibility for its own profit or losses, and independent operation. From the
legal point of view, the parent company is only liable for the liabilities of the finance
company in its business activities to the extent of its capital contribution to the finance
company; the finance company, as an independent legal entity, is liable for the oper-
ating liabilities as a subsidiary to the extent of all its own assets, and both exist as
independent legal entities.
The legal basis for the transfer of funds is the equal status of the finance
company and the subsidiaries in the conglomerate. As far as the group settlement
center is concerned, as a functional department of the conglomerate, it is dependent
on the instructions of the parent company to allocate the funds of the enterprises in the
conglomerate. As one of the subsidiaries of the conglomerate, the finance company
has the same legal status as the other subsidiaries, which is also the legal basis for
the finance company to be different from general fund reconciliation centers with
weakened administrative intervention.
3.3.2 Business of the Group’s Finance Company
Traditional Centralized Management of Funds

In practice, the traditional centralized fund management models include the reim-
bursement center mode, the internal bank mode, the fund settlement center model
and the cash pool mode, and the following is a brief description of the various models
of fund management:
(1) Reimbursement center mode: A highly centralized fund management model,
with cash receipts and payments centralized in the reimbursement center. This
model can be divided into a unified collection and allocation model and an
imprest allocation mode: (1) unified collection and disbursement: Subsidiaries
do not have a separate bank account or a finance department, all the group’s
funds are collected and disbursed at the group headquarters, and the use of
funds, decision-making, investment and financing are all controlled by the parent
company. (2) Allocation of imprest: Subsidiaries can set up a separate bank
account, but not a finance department; the group allocates a certain amount
of imprest to the subsidiaries according to certain criteria and the subsidiaries
use the funds within the limits; every income must be submitted to the parent
company, and cash expenditure exceeding the criteria must be approved by the
parent company.
Although the reimbursement center model helps to centralize the group’s funds
and maximize control over the flow of funds, and is suitable for centralized manage-
ment, its drawbacks include: (1) it is easy to create a deposit of funds; (2) information
asymmetry makes it difficult for the group to control the demand for funds due to
the lack of complete information on each department; (3) the group headquarters is
overloaded (Fig. 3.1).
(2) Internal bank model: Based on the basic functions and management model of
banks, an internal bank is set up within the enterprise to establish a lending
and borrowing relationship between the parent company and its subsidiaries.
Subsidiaries open an accounts with the internal bank and handle cash receipts
and payments centrally; subsidiaries are not entitled to raise funds from the
outside separately, but they may open a deposit account and a loan account in
the internal bank to achieve the “separation of deposit and loan and paid use”;
subsidiaries can arrange their own use after receiving loans from the internal
bank; the group establishes an information feedback system to monitor the
operation of the funds.
The internal bank model is similar to the finance company model and aims to
ensure internal circulation of funds and reduce the cost. However, as the internal bank
does not have an independent legal personality, it does not meet the requirements of
the regulatory authorities and is not able to expand external financing, while on the
other hand, the internal bank is essentially a functional department of the group, so
it is susceptible to administrative interference and has less initiative to allocate funds
(see Fig. 3.2).
(3) Funds clearing center model: A funds clearing center is set up at the group
headquarters to carry out unified settlement of subsidiary funds. Subsidiaries
have a separate bank account and a finance department, with the right to
operate and make decisions on funds; in actual operation, subsidiaries open
an internal account in the settlement center, which are connected with the
external accounts opened in banks, and realize the centralization of funds
through banks; subsidiaries transfer the funds in excess of the limit to the settle-
ment center’s account every day according to the regulations, and the settlement
center approves the daily imprest of each subsidiary and uniformly allocates the
monetary funds required by each member.
In this mode of fund settlement, subsidiaries do not have to centralize all their funds
in the parent company and have greater freedom in making operational decisions.
Moreover, the seperation between receipts and payments enable the parent company
to effectively control the financial situation of its subsidiaries (see Fig. 3.3).
a) Unified collection and allocation model
b) Imprest allocation model
Fig. 3.1 Operating flow of the reimbursement center model. Source Industrial Securities, What Do
You Know about a Group’s Finance Company?
(4) Cash pool model: With the help of commercial bank services, the parent
company and the subsidiary company set up a shared account, i.e. a cash
pool, to achieve centralized management of funds. The parent company opens a
parent company account (“cash pool”), and the subsidiary opens a sub-account
under the parent company account with a certain overdraft limit; the bank auto-
matically clears the subsidiary account every day, the original balance of the
subsidiary account is transferred to the parent company account as a loan to
the parent company and interest is charged, and the original overdraft of the
Fig. 3.2 Operating model of the internal bank model. Source What Do You Know about a Group’s
Finance Company Industrial Securities
Fig. 3.3 Operating flow of the funds settlement center model. Source What Do You Know about a
Group’s Finance Company Industrial Securities
subsidiary account is returned by the parent company as a loan from the parent
company and interest is paid. The adoption of this model in funds management
has the following advantages: (1) it helps to understand and control the cash
flow of the sub-account in a timely manner and improves internal control; (2) it
improves the efficiency of the use of funds by charging interest on deposits and
loans. However, under the current regulations, enterprises cannot borrow/lend
directly from/to each other, but have to borrow through entrusted loans, which
increases the service charge for fund transactions and reduces the profitability
of the enterprises (see Fig. 3.4).
On the whole, there are two major problems with the commonly used fund
management models: Firstly, the departments set up are all functional departments
of the group, and in practice, except for the reimbursement center model, which is
strictly controlled by the parent company, the other three models are subject to admin-
istrative intervention by the group to varying degrees, and their ability to transfer
funds on their own is weak; secondly, the lack of financial licenses makes it difficult
to carry out financial activities such as external financing and investment, and the use
Fig. 3.4 Operating flow of the cash pool model.
of funds still faces the problem of low efficiency. At the same time, with the expan-
sion of the scale and the increase of the hierarchy of the group, on the one hand, the
demand for funds from different departments has increased, and on the other hand,
the number of subsidiaries under the group has proliferated, which has increased the
amount of deposited funds and demanded higher efficiency in the use of funds (see
Table 3.3). The emergence of finance companies actually combines the advantages
of various capital management models, and makes up for the shortcomings of the
previous models through internal and external coordination.
The Operating Models of a Group’s Finance Company

Different from the above-mentioned centralized fund management models, finance
companies are mainly divided into the following four major segments from the
perspective of the operation model.
(1) Fund raising: Internal pooling + external funding.

Internal pooling: Group subsidiaries set up an internal account with the finance
company to deposit free funds, and the finance company provides interest for the
deposits, which facilitates the pooling of idle funds within the group. At the same
time as the group members open an account with the finance company, they open
income and expenditure accounts with banks and authorize the finance company to
access the bank accounts and make transfers. The balance of the income account
is credited to the internal account of the finance company at the end of each day.
The finance company provides interest on deposits to group members with a positive
balance in their accounts with the group finance company, and charges interest on
loans to group members with a negative balance in their accounts.
External financing: Based on its independent legal personality and financial
license, the finance company can obtain external financing through bill business,
interbank lending business, issuance of finance company bonds and loans from
commercial banks.
Table 3.3 Comparison of the advantages and disadvantages between common fund management
models
Fund management models Advantages Disadvantages
Reimbursement center model It helps the group to reduce The flexibility of the
capital deposits and increase subsidiaries’ operation and the
the speed of turnover enthusiasm of increasing
It can control the flow of cash revenue and reducing
and reduce the cost of funds expenditure are limited, thus
The imprest allocation model reducing the efficiency of the
can, to a certain extent, whole group’s business
alleviate the resistance of activities and financial activities
subsidiaries to the It is easy to overload the group
concentration of funds headquarters
Internal bank model The pooling of deposits and The internal bank does not have
loans ensures that funds are an independent legal
circulated within the group, personality and does not meet
which reduces external the requirements of the
financing and lowers the cost supervisory authorities as a
of funds borrowing / lending entity
The model concentrates Shareholders are often reluctant
temporarily idle funds and to accept this model when there
ensures efficient use of funds are multiple levels of legal
by members through credit entities in the group
relationships
High flexibility in operating
activities of subsidiaries and
positive cost control
Fund settlement center model The fund settlement center The fund settlement center is
assists subsidiaries in the only an internal management
collection and payment of body of the group, without a
transaction amounts and the legal personality and a financial
settlement of internal license, and lacks external
transactions, reduces the time financing, intermediation and
spent in transit and increases investment functions
the efficiency of fund turnover There are often irregularities in
Subsidiaries do not have to the operation and the parent
centralize all their funds in the company interferes with the
parent company and have operation of the fund settlement
greater freedom to make center through administration
operational decisions
The parent company is able to
keep track of subsidiaries’
capital operations in a timely
and effective manner
(continued)

Fund management models Advantages Disadvantages
Cash pool model The use of the bank’s Subsidiaries are not guaranteed
web-based services can a position in the cash pool,
improve efficiency and reduce which reduces their autonomy
costs Under the current regulatory
It helps to understand and conditions, enterprises cannot
control the cash flow of borrow / lend directly from / to
sub-accounts in a timely each other, they have to lend
manner and improves internal through entrusted loans, which
control increases the service charge for
Subsidiaries can earn interest fund transactions and reduces
on their deposits in the fund the profitability of the
pool, while they need to pay enterprises
interest for loans, which is
conducive to prompting
members to use funds
rationally and reduce fund
occupation
(2) Fund settlement: Based on the internal accounts opened by group members
with the finance company, business transactions between group members and
between group members and external enterprises are settled.
(3) Financing: Financing services are provided to group members through the
function of the capital hub. As the group’s internal capital hub, the finance
company provides internal/external financing within the group, which mainly
involves: providing senior loans, buyer’s credits, finance leases, installment
payments, etc.; adopting performance criteria and differentiated interest rate
pricing for group members; conducting bill discounting business to provide
short-term liquidity; organizing and arranging consortium loans by the leading
bank to meet large-scale fund needs (Fig. 3.5).
(4) Use of funds: Maximization of the benefits of the group and the use of funds.
The finance company can select enterprises with development potential within
the group and provide them with direct equity investment to raise long-term
development funds. The finance company can also establish a pool of invest-
ment products and select among them investment products that meet the risk
preference of the finance company and meet its requirements of safety, liquidity
and profitability, and set up a pool of alternative products for timely investment.
Fig. 3.5 Operating flow of finance company centered funds management model. Source Industrial
Securities, What Do You Know about a Group’s Finance Company
3.3.3 Supply Chain Finance Business of the Group’s Finance

Company
Businesses that Can Be Carried Out By the Group’s Finance Company

The specific business of the group’s finance company adopts the framework of “basic
business + advanced business + prohibited business”. According to relevant provi-
sions in the Measures for the Administration of Finance Companies of Groups,
the business scope of the group’s finance company includes 11 basic businesses,
5 advanced businesses and 2 prohibited businesses (see Table 3.4). According to
the data published by China National Association of Finance Companies, the main
businesses of finance companies of groups are “deposits, loans and settlement” of
internal subsidiaries of the group, while the proportion of external financing and
other businesses is generally low.
In terms of asset business and liability business:
(1) Asset business: Mainly regulating the short-term funding needs of internal
enterprises, with short-term loans + interbank deposits + bill discounting taking
the lead.
(2) Liability business: Mainly absorbing funds from group members, and debt
financing is absent.
Table 3.4 Business scope of a group’s finance company

Business type Business scope
Basic businesses (11) (1) Providing financial and financing consultation, credit verification
and related advisory and representation services to members
(2) Assisting members in the collection and payment of transaction
amounts
(3) Approved insurance agency business
(4) Providing guarantees for members
(5) Handling entrusted loans and entrusted investments among
members
(6) Acceptance and discounting of bills for member units
(7) Handling internal transfers and settlements among members and
designing corresponding settlement and liquidation plans
(8) Taking deposits from members
(9) Handling loans and financial leasing to member entities
(10) Engaging in interbank borrowing
(11) Other businesses as approved by China Banking Regulatory
Commission
Advanced businesses (5) (1) Issuance of finance company bonds upon approval
(2) Underwriting of corporate bonds of members
(3) Equity investments in financial institutions
(4) Investment in marketable securities
(5) Consumer credit, buyer’s credit and finance leasing for members’
products
Prohibited businesses (2) (1) No engagement in offshore business or any form of cross-border
business of funds other than assisting members in making payments
and receipts
(2) No non-financial business such as industrial investment or trading
Source Compiled from the Measures for the Administration of Finance Companies of Groups
Advantages of Finance Companies in Supply Chain Finance Business

Finance companies have inherent advantages in providing supply chain finance
services to enterprises within the system: firstly, a finance company has a much
better understanding of the industries and supply chains in which the group oper-
ates than external financial institutions; secondly, the finance company has a closer
relationship with the core enterprises within the system, which enables it to effec-
tively rely on the basis of business transactions to expand supply chain financial
services and effectively control credit risks; thirdly, the technical platform of the
finance company is highly compatible with the information of the internal enter-
prises, which is convenient for the construction of the supply chain finance business
system; fourthly, the business scope of the finance company does not involve the
public, which will not pose systemic risks to the whole financial system; finally, the
finance company can provide long-term and stable support for the group’s supply
chain finance, which is conducive to the strategic development of the supply chain
finance business compared to the cooperation with external financial institutions.
3.4 Industrial Banks + Supply Chain Finance 69
3.4 Industrial Banks + Supply Chain Finance
3.4.1 Industrial Banks
Industrial banks are an upgraded version of finance companies, and an inevitable

direction for the transformation and upgrading and financial innovation of of finance
companies. Industrial banks are an advanced stage in the strategic development of
industry and finance for future corporate groups: Grounded in the physical industry
and based on the core enterprises of the target industry chain and supply chain,
industrial banks can design customized, professional and differentiated financial
products and services for each link of the industry chain and specific supply chain,
and provide comprehensive solutions for all enterprises in the entire industry chain.
Industrial banks have three distinctive features: Firstly, they have distinctive industrial
attributes; secondly, they aim to promote industrial development; and thirdly, they are
professional, comprehensive and highly viscous. The establishment of an industrial
bank is not only a historical choice in response to the development of the integration
of industry and finance in the real industry, but also an important way to meet the
professional and differentiated development of the financial industry, and a major
choice for the transformation and upgrading of finance companies.
3.4.2 Competencies Required for Industrial Banks
Provision of more competitive and industry-specific solutions: Different indus-

tries have different business models and face different financial pain points. Focusing
on the industry and creating specialized solutions means gaining deep insight into
the needs of the industry and the specific supply chain, so as to customize and inno-
vate solutions and be better able to judge and manage risks to better facilitate the
development of the industry chain.
Achievement of broader customer reach and service: If banks can better
address the pain points of industry development, then industry-specific solutions will
be more likely to be welcomed by specific upstream and downstream enterprises in
the industry chain and the supply chain. Better customer service and reputation can
be achieved by focusing on specific industries.
Construction of long-term, stable customer relationships and identification of
customer value: Only by mastering the core needs and pain points of our customers
can we provide practical solutions to them, build strong customer relationships, and
deliver consistently higher consolidated earnings.
Building better risk management capabilities to cope with economic down-
turns and improve operational stability: Industry and supply chain specialization
necessitates gaining a deep industry insight to better judge industry prospects and
cyclicality. At the same time, we can more accurately allocate limited resources to
areas with better assets to improve operational stability.
Building more efficient fore, middle and back-ground synergies: Industry

specialization requires banks to build efficient fore, middle and back-ground syner-
gies. For example, based on a common understanding of the industry, account
managers, product managers and risk managers can work more closely together
to provide products and services to industry customers in a more efficient manner.
3.4.3 Transformation of Finance Companies into Industrial

Banks
Finance companies have the foundation of industry and finance, and have the DNA
to better perform the functions of industrial banks. In recent years, the number of
finance companies has been increasing, the industry has been expanding, business
innovation has been accelerating, and the industry has witnessed a booming develop-
ment, which makes finance companies an important part of China’s financial system.
Finance companies have been operating in a sound and standardized manner, with
their risk management and control constantly improved and functions increasingly
strengthened. They have continued to play a supportive role to the groups, their
industries and the real economy, and have continuously improved the efficiency of
services to the real economy.
As a carrier of the integration of industry and finance, finance companies are the
financial institutions closest to serving the real economy. They must be based on
the groups, serve the groups and the real economy, and better play the function of
“industrial banks”: Firstly, the integration of industry and finance is deepening, the
scope of finance companies’ support for the real economy is expanding, and the scale
is increasing, to continuously strengthen the support for the real economy. Secondly,
they are playing the function of a treasurer, coordinating the allocation of funds,
promoting the upgrading of traditional industries, supporting the development of
emerging industries, and effectively supporting the transformation and development
of industries. Thirdly, they are effectively exploiting the characteristic advantages,
strengthening the comprehensive services for groups, assisting groups to realize
intensive operation and group-based management, supporting groups to reduce costs
and increase efficiency, promoting their industrial re-creation and supporting the
restructuring of industries.
It is clear from the comparison between finance companies and industrial banks
that the transformation of finance companies into industrial banks is a long-term
project, and there are differences not only in target orientation and operation models
between finance companies and industrial banks, but also in regulatory philosophy
and policies. The transformation of finance companies into industrial banks neces-
sitates a breakthrough in financial regulation, which requires finance companies to
gradually expand industrial bank-related businesses, play the role of industrial banks
and build an industrial bank development system through innovative development
3.4 Industrial Banks + Supply Chain Finance 71
models, business channels, cooperation mechanisms and risk control measures under
the existing regulatory framework.
The basic idea of the development of industrial banks is “dominated by industry,
dependent on the group, controlled by one entity, serving the industry and sharing
benefits”. Based on the group it relies on, a finance company should provide inte-
grated, professional, efficient, diversified and personalized financial services to the
real economy that is related to the group or shares the same industry chain, as well
as necessary financial support for the integrated development and synergistic devel-
opment of related industries and the financial industry, and for the deepened reform
of the economic system. At the same time, it is essential to create a good financial
ecology and overall competitiveness of the industry chain, so that all relevant enter-
prises in the industry chain can achieve better development and obtain due economic
benefits due to the overall development of the industry chain. Industrial banks are
an advanced stage of the integration of industry and finance, the biggest common
divisor between finance companies and commercial banks, and the long-term goal
of the transformation of finance companies.
3.4.4 Challenges to Transforming into Industrial Banks
Lack of industry focus and insight: The lack of sufficient industry insight has
become an important bottleneck in the transformation of finance companies into
industrial banks. Take intelligent manufacturing for example, there is a wide range
of intelligent manufacturing, which fields and which kind of customers to focus on,
what differentiated service to provide, those questions are still confusing for many
finance companies.
Limited ability to provide precise services to customers: Another success factor
for industry specialization is a deep understanding of the industry and a firm grasp of
the needs and risk characteristics of different types of customers. The current lack of
a systematic and professional approach to industry and customer research prevents
finance companies from truly understanding the needs of different types of customers
and providing accurate services.
Lack of innovation in solutions: At present, finance companies still use relatively
standard bank products, such as the same products for different customers except for
pricing, but the product features required by customers of different sizes are highly
varied.
Lack of efficient internal support: The division between the fore, middle and
back grounds of traditional finance companies is obvious, and there is no unified
understanding of the industry, even though some finance companies have made corre-
sponding organizational adjustments, they still follow a traditional discrete model
in actual operation, resulting in no real synergy between the fore, middle and back
grounds.
3.4.5 Suggestions for Transforming into Industrial Banks
In order to vigorously develop industry chain finance and improve the effectiveness
of finance companies in serving the real economy, finance companies should take the
initiative to carry out financial innovation, improve the level of industry chain finance
services, ensure effective financial supply, and play a greater role in supporting
the transformation and development of the industry. The supervisory authorities
should require finance companies to operate in a law-abiding, standardized and
sound manner, and at the same time encourage the development of industry chain
finance, increasingly strengthen their functions and positioning, continuously enrich
the financial supply, continue to play a supportive role for groups, their industries
and the real economy, and continuously improve the efficiency of finance companies
in serving the real economy.
Continuously promote market-oriented reform and consolidate the market-
oriented status of finance companies: The transformation of finance companies into
industrial banks will lead to substantial changes in the regulatory body, from multiple
supervision by the CBIRC, groups and state-owned asset management institutions to
a regulatory structure led by the CBIRC, with the supervisory functions of groups and
other regulatory bodies, especially on-site supervision, being greatly weakened. In
other words, the regulatory change of transforming finance companies into industrial
banks will actually make finance companies a more market-oriented, externalized and
competitive entity, so that finance companies may gain external market opportunities
and be “freed” from the strict control of groups, but they may also lose the “motherly
care” from groups and have to face fierce competition in the market. Regulators,
industry associations and groups need to adhere to market-oriented principles and
vigorously promote the market-oriented reform of finance companies, so that they can
truly act as a market entity rather than just an “internal bank” and actively participate
in various market competitions and adapt to various market-oriented reforms, in order
to consolidate the market foundation for the transformation into industrial banks for
further development.
Finance companies should take the initiative to expand their financial service
functions in accordance with laws and regulations: In the process of transforming
into industrial banks, organizational structure, risk control, information system
construction and talent training are key factors for the success of the transformation,
even if finance companies cannot obtain a license, they should enhance their efforts in
the following four areas: The first is the improvement of organizational processes and
management mechanisms. It is advised to implement a flat, professional and vertical
organizational structure with a customer-centric management model, promote busi-
ness process re-creation, and practice centralized operation and fine management.
Second, it is necessary to establish a sound risk management mechanism, improve
the risk management mechanism of industrial banks, ensure that they control the
capital flow, logistics and information flow of upstream and downstream enterprises
in the industry chain, reduce the information asymmetry between industrial banks
and enterprises, and use big data analysis, risk assessment and other methods to
3.5 Examples of Self-financing Development of Foreign Groups 73
strengthen the risk management of the whole industry. The third is the construction
of digital information systems. In the Internet era, cloud storage, network transac-
tions and other information technologies continue to develop, so finance companies
should strengthen the construction of information systems, and achieve the devel-
opment of “Internet + Industry + Finance company” through the construction of
an industry chain finance network platform. Fourth, the introduction and training of
talents. It is also recommended to bring in versatile talents who are familiar with
finance, industry, law, information technology and supply chain management.
Finance companies should adhere to the principle of inclusive regulation and
explore differentiated and restricted licenses: The progress of the reform of China’s
regulatory system in the past, especially the approval of private banks, shows that the
issuance of differentiated and restricted financial licenses is an important regulatory
idea. It is recommended that the regulatory authorities conduct pilot projects to
make industrial banks one of the options for the next category of differentiated
and restricted financial licenses. In order to better support the development of the
real economy, vigorously promote the upgrading of real industries, and improve the
precision, pertinence and effectiveness of financial services to the real economy, the
issuance of restricted industrial bank licenses is a certain possibility.
3.5 Examples of Self-financing Development of Foreign

Groups
3.5.1 General Electric (GE)
GE Group and GE Capital

General Electric (GE) was founded by Thomas Edison in 1878. GE is a company
that provides technology, media, and financial services. The company’s products and
services range from aircraft engines, power generation equipment, water treatment
and safety technologies, to media content, commercial and consumer finance, and
medical imaging. Globally, the company operates in more than 180 countries and
employs more than 290,000 people. With total assets second only to the seventh
largest bank in the United States, its financial company is a world leader in financial
services.
By the end of 2019, GE’s business operations spanned four industry segments,
including power, renewable energy, aviation, and healthcare, as well as GE Capital,
a financial services provider. Accordingly, each sector provides its customers with
technology, solutions, and services in the relevant field, while the capital sector
leases and finances aircraft, engines, and helicopters as well as provides financial and
underwriting solutions. Figure 3.6 shows, based on information from GE’s 2017–
2019 annual report, the revenue and profit share of each of these sectors.
In alignment with GE’s industrial businesses, GE Capital serves different market
segments. GE is known for its expertise in the fields of power, aviation, renewable
Fig. 3.6 General Electric’s revenue by segment. Source General Electric’s financial statements
energy, healthcare, and many others. It creates value in each market by exploiting
its unique opportunities. The integration of GE’s capital and industrial businesses
will benefit customers and promote the sharing of information, but these two sectors
operate parallel and adhere to the principle of fairness.
General Electric Capital Aviation Services (GECAS) is a finance company that has
been leasing aircraft for 50 years. GECAS has a variety of assets, including narrow-
and wide-bodied aircraft, freighters, engines, and helicopters. The company also
provides financing products and services such as sale-leasebacks, asset trading, oper-
ating leases, etc. From 20 offices around the globe, GECAS serves 225 customers in
75 countries, owns, services, or orders more than 1700 aircraft. As an energy investor,
Energy Financial Services (EFS) provides financing and underwriting services for
power and renewable energy projects in order to meet growing demands and meet
sustainability objectives. Industrial Finance (IF) offers working capital services to
GE, as well as medical equipment financing as of December 31, 2018.
GE Capital’s Success Stories
(1) The coordinated operation of GE’s industry and finance has been a major
contributing factor to its rapid growth. GE’s financial and industrial businesses
have forged a strategic partnership that complements and enhances one another.
By extending its industry chain, GE’s financial services sector offers financial
services to its customers, ensuring the continued success of its industrial profits
and the continued expansion of its industry chain. Furthermore, GE Capital has
been able to achieve rapid growth and low-cost funding due to its solid industrial
base and leadership position in numerous industries.
(2) Highly qualified and professional team: GE Capital believes that significant
profits can only be generated by good people and adequate capital investment.
As a result, GE Capital holds regular meetings to discuss the talent issue and
conducts annual assessments. In addition to having an extensive pool of top

talents with extensive financial expertise, GE Capital has maintained sufficient
talent pools for the management of industrial businesses.
(3) Strong expertise in M&A integration: Acquisitions have always been GE
Capital’s core business, and GE Capital has become a model for successful
acquisitions. GE, unlike most other domestic firms whose financial capital
is concentrated in the banking, insurance, and securities industries, seeks to
acquire almost every possible company. After integrating a large number of
M&A resources, GE Capital has developed a set of replicable and common
M&A models. GE Capital has maintained a competitive advantage over the
years by integrating M&A resources into its core competencies.
(4) Deep industry expertise and strong new business development capabilities:
GE’s involvement in the financial services sector has deepened as its leading
international manufacturing technologies have evolved. For instance, GE has
significant expertise in aviation, automotive, healthcare, and energy infrastruc-
ture technologies and equipment. It also offers financial services to end users.
The company has also expanded into real estate, leasing, media, and corpo-
rate finance. General Electric is actively involved in the development of new
businesses. The GE Capital direct expansion team is the world’s largest for
emerging companies. As part of its globalization strategy, it is actively deploying
into emerging markets, actively seeking rapid growth and establishing a pres-
ence in industries such as new energy and environmental protection, as well as
increasing its investments in research and development in emerging industries
and achieving leading positions.
(5) Proven risk management mechanisms: The “walk before you run” market model
has always been one of GE Capital’s hallmarks. GE Capital treats all projects
equally, regardless of the size, before investing in a particular market and most
of these projects are discussed at its monthly board meetings. GE Capital has
also implemented a comprehensive risk control process since 1970. Before being
presented to the board of directors, all proposals must undergo a rigorous review.
(6) Strong capital management and utilization capabilities: firstly, there are signif-
icant financial savings resulting from centralized capital management, and
secondly, the company relies on the support of the general industry to attain
high financial ratings on capital markets. In its capacity as a finance company,
GE Capital receives specific support from within the GE Group—GE transfers
its AAA industrial credit rating to GE Capital, which allows it to obtain a lower
cost of capital than Citigroup and HSBC, and makes finance a core competency
of the company.
Dynamic strategic alignment: General Motors has maintained its position as a
large and successful diversified company by promoting organizational innovation and
flexibility in order to attain sustained growth. GE developed a highly decentralized
organizational structure in the 1960s. GE began implementing its famous “strategic
planning for strategic business units” in the early 1970s. In the midst of the financial
crisis in 2008, GE Capital continued to adapt and optimize its business structure to
meet the changing needs of the market and GE. GE Capital has been able to maintain
stability and growth through restructuring its businesses, reducing risky operations,
increasing cash flow, increasing liquidity, and reducing costs.
3.5.2 Siemens
Basic Information About Siemens

Founded in 1847 by Werner von Siemens, Siemens is one of the world’s leading
electromechanical companies. Siemens is a technology company active in almost
every country in the world, specializing in automation and digitization of processes
and manufacturing, intelligent infrastructure for buildings and distributed energy
systems, power generation and distribution from conventional and renewable ener-
gies, intelligent railways and highways, as well as mobile solutions for medical
technology and digital medical services.
Siemens consists of the parent company of Siemens AG and its subsidiaries.
Siemens was incorporated in Germany and has its corporate headquarters in Munich.
As of September 30, 2019, Siemens had approximately 385,000 employees.
At the end of the 2018 financial year, Siemens announced its “Vision 2020+”
corporate strategy. The main objective of “Vision 2020+” is to provide individual
Siemens enterprises with greater entrepreneurial freedom under the strong Siemens
brand in order to strengthen their focus on the market. In the 2019 financial year,
Siemens implemented a new organizational structure that comprises three operating
companies, Digital Industry, Intelligent Infrastructure and Gas & Power, and three
strategic companies, Siemens Healthcare, Siemens Gamesa and Siemens Alstom
(in the pipeline). Together, these six businesses are known as the “Industrial Busi-
nesses”. Siemens Financial Services (SFS) supports Siemens’ industrial businesses
and conducts its own business with external customers. In the financial statements of
Siemens, financial services remain a separate sector from the industrial businesses.
Business of Siemens Financial Services
(1) Basic information about Siemens Financial Services

Siemens Financial Services (SFS) provides leasing solutions and equipment in the
form of debt and equity investments to support its customers’ investments through
project and structured finance. Based on its comprehensive financing knowledge
and technical expertise in Siemens’ business areas, SFS provides financial solu-
tions for customers of Siemens’ members and other companies. Initially, all of
Siemens’ financial businesses were centralized in the Finance Department (also
known as the Central Finances) at its headquarters. In 1997, Siemens completely
separated all financial functions from the Finance Department, with the exception of
the Group’s financial policy development and guidance functions, and established
Siemens Financial Services as a full-time department responsible for specific finan-
cial operations. In April 2000, Siemens Financial Services was further developed
Fig. 3.7 Business model of siemens financial services. Source Siemens’ financial statements
from a functional department into an independent legal entity with 100% ownership
by the headquarters, in order to meet the needs of the financial market and its own
development.
In terms of management structure, the Chief Financial Officer (CFO) of Siemens
is responsible for two main businesses: Central Finances (CF) and Financial Services.
CF is responsible for the development of financial strategies and polic of the entire
group, while SFS is responsible for the implementation of policies and specific
operations. As SFS provides services exclusively to the Group’s member compa-
nies, its business development is not subject to the relevant financial licenses under
German law, nor is it subject to the supervision of the German Central Bank or other
governmental restrictions (the development of corporate pension management and
its advisory business requires the approval from relevant regulatory authorities). The
business model of SFS is illustrated in Fig. 3.7.
SFS is not only the “internal bank” of Siemens, it is also responsible for liquidity
management, cash flow concentration, optimization of the asset and liability structure
and management of capital risks. It also provides all Siemens member companies with
professional and comprehensive financial advisory services and financial support,
such as fund management, project and trade financing, internal settlement, credit,
receivables management, bill clearing, pension management, etc.
Through business setup and division of responsibilities, SFS realizes its functions
as a Siemens subsidiary and legal entity. With professional advantages and skills, it
can provide a full range of financial services, while reducing financial risks and costs,
satisfying the strategic needs of the Group and improving the competitive advantage
of financial services.
(2) Business Model and Value of SFS
SFS’ primary business model is to support Siemens and its global business customers
with capital strength and financial expertise. It focuses on providing technical consul-
tation and financing services in three key industries (energy, infrastructure and health-
care), leveraging the Group’s expertise in key events and related industries, and
providing financial support and specialist risk management services to each business
sector as an internal financial risk specialist.
The first is centralized capital management. Capital pooling and pool management
are also the most successful features of SFS, and they have the following characteris-
tics: Firstly, capital pooling by Siemens is mandatory for its member companies, and
the company requires each member to pool funds in accordance with the regulations.
Secondly, Siemens only concentrates capital from controlled companies (holding
more than 50% of shares). Thirdly, SFS practices hierarchical management of bank
accounts. Depending on the division of labor between different cooperative banks,
funds are eventually combined into a few main central pools in euros, dollars and
pounds. Within the same bank, there is direct movement between pools, but for
different banks, cash has to flow between higher level pools. Fourthly, the “pooling
agreement” between Siemens and its cooperative banks is based on a zero balance
account (ZBA). Some banks may not be able to offer ZBAs for objective reasons, so
they need to provide virtual pools to ensure a high level of concentration.
Through capital concentration and pooling, Siemens satisfies the company’s
capital requirements, provides capital for the development of its business units,
develops a high level of capital and financial risk management, and presents its
industrial companies with customized financing services. For example, in a Russian
railway project, SFS took advantage of its strengths in the financial sector, developed
customized financing plans and provided customized financial solutions for Siemens
Rail Systems’ project thanks to its close cooperation with banks. The project won
the Trade Finance magazine’s “Best Idea of the Year Award” in 2010.
The second is the synergy between finance and industry. Industry expertise is used
to provide financing services, primarily in the energy, industry and health sectors,
covering consumer finance, capital finance and debt financing. For example, SFS
has in-depth knowledge of the healthcare industry and is able to provide financial
solutions to healthcare clients. Through the client’s in-depth knowledge of a US
bank, a project for the National Jewish Hospital (US$13 million) was completed
within five weeks, and the hospital’s loyalty to Siemens was also enhanced through
the integration of industry and finance.
The third is investment with its own capital. The company invested its own capital
in new technologies as a pilot investment to support Siemens’ research and develop-
ment in core industries. For example, SFS used its own funds as capital to invest in a
solar energy company in Israel and was responsible for the overall project manage-
ment, where it made full use of Siemens’ strengths in the new energy sector and used
the solar energy company as an experimental base to improve the technological and
market competitiveness of the new industry.
Fourthly, SFS plays a strategic service role, grasps the overall strategy of the
company and promotes its implementation. SFS has four business departments,
including the Commercial Financing Department, the Equity Investment Depart-
ment, the Insurance Department, the Capital and Investment Department. There is
also a department responsible for the Group’s strategic management and M&A, and
a global fund management team to serve the entire Siemens Group.
3.5.3 Mitsubishi Group
History of Mitsubishi Group’s Industrial Development

Mitsubishi Group is a typical Japanese conglomerate that integrates industry and
finance, with its origins as a shipping company founded by Yataro Iwasaki in 1871.
Currently, in the industrial sector, Mitsubishi Group owns the world’s largest indus-
trial enterprises such as Mitsubishi Motors, Mitsubishi Electric and Mitsubishi Heavy
Industries; in the financial sector, Mitsubishi Group owns the world’s largest commer-
cial bank, Japan’s largest trust bank, property and casualty insurance company and
life insurance company; in the trade sector, it owns the commercial enterprise with
world’s highest annual revenue.
At present, Mitsubishi Group is strongest in the heavy and chemical industries,
and owns the largest integrated heavy industry company in Japan—Mitsubishi Heavy
Industries. Mitsubishi Heavy Industries was established in 1934 when the Iwasaki
family merged Mitsubishi Shipbuilding Company and Mitsubishi Aircraft Manu-
facturing Company. In 1970, Mitsubishi Motors Corporation was spun off from
Mitsubishi Heavy Industries and has grown to become one of the world’s largest
automakers, with annual sales exceeding those of Mitsubishi Heavy Industries. In
addition, Mitsubishi Group has a number of large companies that are at the forefront
of their respective industries, such as Mitsubishi Electric, Mitsubishi KaKoKi Kaisha
Ltd. and Asahi Glass.
In terms of commercial enterprises, the predecessor of Mitsubishi Corporation,
a subsidiary of Mitsubishi Group, can be traced back to the establishment of a coal
sales division in 1896. The division was renamed Mitsubishi Joint Venture Sales
Department in 1899, and at that time was mainly involved in the sale of coal and
copper, as well as export business, before being consolidated through M&A in 1954
to form Mitsubishi Corporation. Mitsubishi Group has strong financial strength and
many large enterprises, which places Mitsubishi Corporation in a very favorable
competitive position. Since 1968, Mitsubishi Corporation has become the largest
super integrated trading company in Japan and one of the largest trading compa-
nies in the world. The powerful industrial enterprises and commercial enterprises
in Mitsubishi Group have combined to set up “Kinyokai”, with 29 member enter-
prises, which are the core strength of Mitsubishi Group. In addition to the “Kinyokai”
members, there are 32 large enterprises that are quasi-Mitsubishi Group members.
Mitsubishi Group’s Integration of Industry and Finance

Mitsubishi Group’s entry into the financial sector can be traced back to its acquisition
of the 119th National Bank of Japan in 1885, followed by the establishment of Bank
of Mitsubishi in 1919, which eventually became Bank of Tokyo-Mitsubishi, currently
the largest bank in Japan, based on which Mitsubishi Group’s financial platform was
built. At present, Mitsubishi Group includes strong financial companies such as Bank
of Tokyo-Mitsubishi, Mitsubishi Trust Bank, Meiji Life Insurance and Tokyo Marine
and Fire Insurance, and the financial force of Mitsubishi family, if combined, will
be one of the strongest financial institutions in the world. These financial institutions
are the core of Mitsubishi Group and are closely linked to each other through their
shareholdings in the Group’s core industrial and commercial enterprises, helping each
other to prosper together. Bank of Tokyo-Mitsubishi was formed in 1996 through the
merger of Bank of Tokyo and Bank of Mitsubishi. At that time, Bank of Tokyo was the
only bank designated by the Japanese government to specialize in foreign exchange,
and was the world’s largest specialized foreign exchange bank. Bank of Mitsubishi
was the largest commercial bank in Japan and the world, and had always been the core
institution of Mitsubishi Group. After the merger of Bank of Mitsubishi and Bank of
Tokyo, they made full use of their core strengths in their respective fields and built
up a large and well-developed domestic and international business network, which
greatly brought into play the scale merit of the bank and produced huge synergies
and scale effect.
Mitsubishi Trust Bank was established in 1927 by the Iwasaki family as an impor-
tant institution of Mitsubishi Group and is now the largest trust bank in Japan and
one of the largest in the world. In Japan, trust banks are an important form of inte-
gration of industries and financial capital, and they often hold large amounts of stock
in heavy industry companies and provide a stable long-term source of capital for the
development of the heavy industry. Like other trust banks, Mitsubishi Trust Bank has
played an important role in the development of the industrial companies of Mitsubishi
Group.
Meiji Life Insurance Company was the first life insurance company in Japan,
established by the Iwasaki family in 1881, and it is now the largest life insurance
company in Japan. The huge sources of capital and the accumulation of funds over
time have made Meiji Life Insurance Company a major shareholder not only in
Mitsubishi but also in many other major Japanese companies, and the huge amounts of
long-term capital acquired by Meiji Life Insurance Company have created conditions
for the growth of Mitsubishi Group.
Tokyo Marine and Fire Insurance Company, founded by the Iwasaki family in
1879, is now the oldest and largest property and casualty insurance company in
Japan and, like Meiji Life Insurance Company, holds shares in Mitsubishi and other
major companies as a major shareholder in many of them.
Features of Mitsubishi Group’s Integration of Industry and Finance
(1) Banks played a leading role in the integration of industry and finance of
Mitsubishi Group. After the Second World War, the banking sector provided
substantial financial assistance for the reconstruction of Japanese enterprises,

enabled the conglomerates to grow rapidly in a relatively short period of
time, build into large, modern, conglomerated and international companies, and
enhance their international competitiveness. The banking sector has played a
fundamental role in Mitsubishi’s integration of industry and finance. To this day,
Bank of Mitsubishi continues to play an important role in Mitsubishi Group as
a whole. Bank of Mitsubishi is the largest shareholder in almost all Mitsubishi
Group companies. Bank of Mitsubishi, Mitsubishi Trust Bank, Meiji Life Insur-
ance Company, Tokyo Marine and Fire Insurance Company and other Mitsubishi
financial institutions all have excellent integrated financial capabilities.
(2) Within the group, commercial and financial companies hold shares in each other
and are not affiliated with each other. Mitsubishi Group’s integrated industry and
finance model is a non-controlling type in which commercial and financial enter-
prises hold shares in each other and are not affiliated with each other, i.e. each
member of the Group holds shares in each other, and the relationship between
the members are sister companies, and do not belong to one another. Each enter-
prise becomes the dominant shareholder of the other, forming an interlocking
shareholding structure. The financial institutions and trading companies are at
the core of this system of mutual shareholding. This is also a common model
for large Japanese conglomerates to integrate industry and finance.
In short, for Mitsubishi Group, the integration of industry and finance has
contributed significantly to the rapid growth and expansion of the conglomerate,
the establishment of a defense system against multinational competition and the
strengthening of its international competitiveness.
Chapter 4
Technical and Legal Foundation
of Digital Debt Instruments
4.1 iABCDE Drives Fintech Innovation
With the issuance of the FinTech Development Plan (2019–2021) by the People’s
Bank of China, FinTech has become an important tool for industrial and financial
enterprises to conduct business. While technology drives industrial finance, creating
competitive services and promoting industrial innovation and upgrading is the only
way to enhance China’s comprehensive national power and move towards becoming
a technological power. Emerging technologies represented by iABCDE (IoT, AI,
Blockchain, Cloud Computing, Data Analytics, Edge Computing) are playing an
important role in financial innovation, driving supply chain finance to achieve break-
throughs in various aspects and becoming a new engine for the development of digital
economy (Table 4.1).
4.2 Technical Foundation of Digital Debt Instruments
4.2.1 Definition and Key Technical Features of Blockchain
Satoshi Nakamoto, who invented Bitcoin, has improved the concept of the blockchain
to overcome some limitations of the original method. The next section examines
some of the fundamental technical features of the Bitcoin blockchain and how it
connects with other projects. Terms such as “distributed ledger technology” (used
interchangeably with “blockchain”) and “cryptography” are also covered later.
Peer-to-peer Value Exchange System

Bitcoin is a fast, secure, and borderless payment system that provides a solution to
the growing need for payment systems. There are, however, two technical issues
with completely digital currency, namely, how to guarantee that it is real, and how
to prevent duplicate payments.
https://doi.org/10.1007/978-981-19-3513-8_4
84 4 Technical and Legal Foundation of Digital Debt Instruments
Table 4.1 Basic information of iABCDE technology

Technological applications and Applications in financial innovation
benefits
IoT Achieves real-time commodity Automotive insurance companies
tracking: enables supporting integrate IoT technology in key areas
industrial and financial services to be such as underwriting, claims
available “anytime, anywhere” processing and anti-fraud to provide
Enhances real-time data collection more personalized services to
and transmission: improves the customers, thus optimizing the
efficiency of industrial and financial relationship with customers
services
AI Breaks through productivity Intelligent services for all types of
bottlenecks: replaces manual services customers in the financial industry
in areas such as intelligent investment through the application of AI
advisory, financial forecasting and technology in the areas of intelligent
anti-fraud, financing and credit, risk control, intelligent investment
security monitoring and early advisory and intelligent customer
warning, and intelligent customer service
service
Blockchain Builds a credit system: industry can A blockchain sharing platform is
use blockchain technology to solve built through the application of
the problem of data sovereignty and blockchain technology to share
trustworthiness issues, establish a information and provide
credit system with the help of technological support in the areas of
blockchain technology, and provide credit checking and commercial due
credit support for industrial financial diligence of enterprises
services
Cloud computing Optimizes data storage: Supports A cloud service platform is built to
total non-real-time and incremental provide production and trade
real-time data access to reduce data information storage, offline
storage operation costs computing and cloud computing
Supports data computing, including services for upstream and
streaming computing, offline downstream enterprises in the
computing and in-memory computing industry chain to drive their daily
business operations with data
Data analytics Enable precision marketing: Data analytics solutions have been
identification, acquisition of widely used in the traditional
industrial finance customers and financial sector, with major financial
precision sales institutions carrying out digital
Provide risk assurance: build credit transformation and using data assets
risk control data to provide a basis for in digital marketing and big data risk
SME credit control to conduct business
(continued)
4.2 Technical Foundation of Digital Debt Instruments 85

Technological applications and Applications in financial innovation
benefits
Edge computing Real-time, fast and efficient: responds Combination of 5G and IoT enables
to orders and makes decisions more rapid response to data analysis,
quickly, and dramatically improves improves computing efficiency and
the efficiency of financial transactions secures financial customers’ data
Intelligent security and energy
efficiency: better protection of private
customer data and ability to prevent
real-time fraud
Source Based on PricewaterhouseCoopers’ Industry and Finance 2025: Get Ready for Changes with
Mutually Beneficial Growth
In the case of digital assets, it is possible to “multiply” them by simply transferring

electronic files and retaining copies. Because they are computer-based documents,
they may be duplicated without a third party maintaining a record of the holder’s
account balance. A central ledger is therefore necessary in order to verify each
banknote online. An authoritative record must be kept of all digital asset transac-
tions. In other words, Satoshi Nakamoto proposes a continuously updated public
ledger system based on public or private key cryptography to be in place along with
consensus mechanisms.
Peer-to-peer network is defined as a distributed network architecture in which
participants share a portion of their own hardware resources, such as processing
power or storage capacity. The shared resources allow for the provision of network
services and content (cyberspace for sharing, storing and collaborating) so that peer-
to-peer collaboration can occur directly without the need for intermediaries. As an
example, unlike the current banking system, Bitcoin transactions are recorded and
stored by a large number of participants on the network, rather than any proprietary
central server, and since no manual intervention is required, transactions can be
completed within minutes (Fig. 4.1).
For digital currencies to be widely accepted, public trust must be gained and main-
tained. Therefore, counterfeiting must be prevented at all costs. As digital currencies
are simply bits representing value, digital currency transactions must be conducted
in a manner that prevents tampering during transportation, receipt or storage. An
architecturally distributed peer-to-peer network records all events in blocks in a
blockchain. A “timestamsp server” keeps track of all transactions to prove they
occurred at a specific time and sorts them chronologically. To ensure integrity, each
new block is cryptographically linked to the previous one. Owning a Bitcoin is deter-
mined by its history of transactions, making it a de facto unique asset (a digital token).
After a payment has been made with a digital currency such as Bitcoin, a malicious
participant is unable to rewrite the process (i.e. the block that records the transaction)
and thus cancel the transaction and make multiple payments with the digital currency.
The solution to prevent tampering is provided by digital signatures, a concept first
proposed by W. Diffie and M. Hellman in 1976 and integrated by Satoshi Nakamoto
Fig. 4.1 Transition from centralized system to distributed system
into his blockchain design. Digital signatures convert messages (i.e. events) into
cryptographically signed documents so that anyone can determine who sent them.
The signature uses a private key to sign the message and a public key to verify
it, so that only messages signed by the private key can be verified by the public
key. This process is called cryptographic evidence, and defined together with digital
currency as a series of digital signatures . Therefore, having the key to unlock a
digital currency is equivalent to having the cash, and if the private key is lost, then
all the digital currency contained in the corresponding digital wallet is also lost.
Unlike the centralized system that governs mainstream economics, the distributed
ledger approach assigns responsibility and control to the entire network, and more
importantly, to each individual user through proof of a hash-based work process.
Protecting the private key is a matter of security, as if the private key is lost, the
entire contents of the digital wallet will be lost. The blockchain database contains no
personal data, and transactions are anonymous. It is possible to solve the problem with
digital currencies by keeping digital cash in various wallets, but the problem becomes
even more critical if security interests or property rights are also registered on the
blockchain. Property ownership and security interests are actually more valuable and
indivisible, however, it is unlikely that the judiciary will be able to recognize property
rights on the blockchain. Furthermore, if some specialized start-ups offer private key
security services or offline storage of “cold wallets” in the near future, then proper
protection of private keys will be a prerequisite for large-scale blockchain adoption.
Public or Private Key Cryptography

A hash is an output that is generated when a Hash function receives an input. It is
unlikely to be able to predict what specific output will be returned since the output is
random and of the same size. Additionally, tampering is impossible since hashes work
in one direction and cannot be decoded. In fact, a hash is a compressed representation
of the input string that can be used as an identification of that string (Fig. 4.2).
Fig. 4.2 (Bitcoin) blockchain protocol
Group Consensus Mechanism

The decentralised property system raises the question of how to maintain a unified
data across different participants in the network. In order for all nodes to agree on the
actual state of the ledger, an explicit group consensus mechanism is required. The
Bitcoin blockchain uses a proof-of-work (PoW) consensus mechanism to implement
the group consensus mechanism.
Proof-of-work mechanism
Proof-of-work mechanism involves solving a complex computational problem (a
hash problem) when creating a new block of transaction. The consensus protocol is
based on a hard-to-solve but easily verifiable problem, thus avoiding the possibility
of other nodes redoing the entire proof-of-work in order to receive the data. Through
this mechanism, each block is connected to the previous one, forming a chain.
A hash function is comprised of a header hash of the previous block and a “random
number” , which are linked together to form “chain links”. In order to obtain the
exact random number, the most important part is generating an output hash, and its
values begin with many zeros. To target a string with a certain number of zeros is
an extremely challenging task for computers, and iteration provides the only reliable
means to resolve the issue. But in order to accomplish this task, the computer must
perform an incredible amount of calculations. This is a “proof-of-work” and its
associated methods are referred to as mining.
Proof-of-work mechanisms allow Bitcoin to protect the integrity of the
network and transaction data, as well as maintain the immutability of the
blockchain after a certain number of blocks have been added.
Since the inception of Bitcoin, alternatives to the proof-of-work have come into
being, like scripted proof-of-work or hybrid algorithmic proof-of-work, all of which
can accelerate block generation time. A different verification process can reduce the
verification time per block to not more than one minute (Fig. 4.3).
The debate over which verification process best guarantees speed, efficiency and
security at the same time seems to be unresolved, but proof-of-work seems to be
Fig. 4.3 Generation of SHA256 “timestamp” block hash header

the most commonly used process . As the actual block size is limited to 1 MB, it
can only process 7 transactions per second, but unfortunately this is not enough to
meet economic demand. In contrast, Visa’s network can process more than 1000
transactions per second. In 2013, Nasdaq released an official report stating that the
system could process more than 1 million transactions per second in a single trading
day.
Private and Public Distributed Authentication Network

Even today, unlicensed public blockchains require proof-of-work, which limits their
wider applications. In addition, a study in 2014 by the National University of Ireland
concluded that, under reasonable assumptions, the energy used to generate (bitcoin)
blockchains and keep the systems running is comparable to the total energy consump-
tion of Ireland. The study also concluded that the whole “industry” was theoretically
flawed given that the costs of individual miners (i.e. network participants updating
the blockchain) outweighed the returns.
Furthermore, the industry of bitcoin mining is largely made up of unknown groups
(large miners), many of whom are ideologically opposed to incorporation as a form of
organization, or in countries with inadequate legal systems, which makes regulation
extremely difficult and poses great risks.
Therefore, a number of financial organizations developed “permissioned ledgers”
which use pre-selected security nodes for authentication in their private networks or
federated systems. Clearly, this concept is at odds with the decentralized nature of
Bitcoin, but it may still be applicable to finance.
Essentially, these solutions do not use hard computing techniques (such as proof-
of-work) to protect a fully public and uncontrolled network, but rather create a system
where access is tightly controlled, and where permission to modify or even read the
state of the blockchain is restricted to selected users.
Buterin identifies two types of licensed blockchain applications, federated
blockchains and fully private blockchains, while the former are distributed ledger
systems in which the consensus process is controlled by a pre-selected group of
nodes. The right to read the blockchain can be public, or limited to the participants.
In a fully private blockchain, the permission is still concentrated in an organization,
and the permission to read can be public or restricted to a closed group of partic-
ipants. Possible application scenarios include database management for individual
companies, auditing or other internal use, so in many cases public readability is not
required at all.
The advantage of a licensed blockchain is that no complex computational block
creation is required and the authentication nodes are known to all. This allows for a
faster validation process and increased scalability, making them more suitable for the
volume of transactions in the mainstream economy and more beneficial to regulators
and lawmakers.
Smart Contracts
Ethereum is an open-source BCT that represents a significant innovation. In addition
to this, it contains an embedded Turing programming system that makes it possible
Fig. 4.4 Continuous operations in smart contract creation and execution
for anyone to create rules by developing and editing codes. Hence, a piece of code
that enforces arbitrary rules can directly control the digital assets it controls. Smart
contracts are designed in order to comply with general contractual terms and to
minimize vicious and unexpected exceptions.
The contract can be regarded as a system of state transitions, a procedure for
transforming a variety of relations of various states upon the occurrence of pre-
planned events (e.g. “expiry date has passed” “goods have been shipped”). These
smart contracts can be configured in a way that reacts to such events (as input) and
insures that the contract is executed correctly between untrusted entities (as output),
without the need for any changes to be made to the written programs themselves.
There are three major characteristics of smart contracts that distinguish them from
ordinary contracts: autonomy, self-sufficiency, and decentralization (Fig. 4.4).
Smart contracts are capable of reacting to external events. Conditions, assets, and
obligations are first established, along with smart contracts on the blockchain. If the
contract is executed, the value will be directly transferred according to the conditions.
The account will automatically settle digital assets.
4.2.2 An Overview of the Distributed Ledge Model

of Blockchain Technology
The distributed ledger can be maintained by either a private network of authenticated

nodes or a shared unlicensed public node. With over 4000 nodes, Bitcoin has by far
the largest network (Bitcoin Information). It is not uncommon for blockchain code
to be open-source, allowing developers to develop new technologies by maintaining
and enhancing the software, or by enhancing the product, service, or application. In
many cryptographic projects, they have been used as open-source, distributed ledgers
(Table 4.2).
Table 4.2 Prospects for the distributed ledger approach

Traditional Fully private Federated Public distributed
centralized distributed ledger distributed ledger ledger
database
Network Many private Private (LAN) Private Public (internet)
networks (intranet verification/public
VPN) ledger (intranet)
Protocol EDI, HTTP Any open source Any open source Open source
protocol, modified protocol, modified protocols (e.g.
or proprietary or proprietary Bitcoin,
protocols protocols Ethereum)
Verification Manual, with Organization Organization Via PoW or PoS
mechanism automation of between between
internal protocols participating nodes participating
only nodes. Integrity of
PoW or PoS with
low difficulty
Scripting Turing-complete Turing-complete or Turing-complete or Turing-complete
system restricted scripts restricted scripts or restricted
scripts
Security Central organized Decentralized, Distributed Through PoW or
identification organized identity organized PoS and
system and recognition system identification cryptography
expensive private (nodes are known system (nodes are theory
data storage and can be legally known and can be
prosecuted) legally controlled)
or PoW, PoS
Privacy Confidentiality of Inter-participant via ciphertext via ciphertext
centrally stored organization
data
4.2.3 Key Features of Blockchain Technology
Blockchain was originally designed to transfer value solely through the form of a
digital currency, and its transaction logic was to design a token system that could
simply transfer balances from one party to another without the involvement of a
third party. This means that the biggest problem in the transactions involved in a
blockchain network is only how to record the balance in a digital asset and how
to perform multi-signature authentication. Systems that integrate digital assets in
a blockchain can encode assets using colored coins (an open source protocol) and
convert them into cryptographic coins (en. bitcoin. it). The blockchain can be used
as a secure, public, append-only storage that uses timestamps and cryptographically
signed hashes, and the hashes represent transactions of assets or documents, and
verify the ownership of assets and the validity of documents. This does not require
the use of third-party hosting services, notaries or any trusted third parties, and allows
for a high level of straight-through-processing (STP).
With Turing-complete blockchains (e.g. Ethereum), the technology now has the
ability to implement a wider range of software routines, including the full functions
offered by the token system, and also opens up the possibility of directly repre-
senting financial securities (e.g. smart bonds) and instruments, while avoiding all the
drawbacks associated with the central database model.
Two uses are identified for blockchains and DLTs: Digital tokens and event regis-
tration. A digital token is a representation of an asset (such as a digital currency,
bond or stock) whose ownership is tracked through the blockchain, as transactions
are registered and verified through a network (e.g. private or public). Event registries
typically store data securely in the form of a hash, which is a “fingerprint” of standard-
ized information (e.g. trade facts or identity information). The hash on the blockchain
proves that a given fact exists at a time-stamped time and that the parties signing the
fact have agreed to it.
In order to assess possible applications, we list the key features of the technical
aspects analyzed in the previous sections: blockchain’s ability to act as a notary,
to clear and settle transactions, to automate contractual relationships, to provide
immutable (public) data storage facilities, and to provide transparent real-time data.
(1) Notarization
Since timestamp-based hash algorithms can “manage” a published ledger,
all information registered in it can be automatically authenticated and times-
tamped without an intermediary (e.g. a notary). Interested parties can know
with certainty that a given message exists at a given date and time. The func-
tionality of a hashed document in a blockchain guarantees its authenticity and
prevents potential tampering.
(2) Clearing and Settlement
As a potential use, the blockchain allows the transfer of any type of digital
asset or asset representation without the need for a trusted third party, through
private/public key encryption and the efficient settlement of transactions and
processing using distributed ledgers. Cash or securities are settled in almost real
time, as the transaction is completed when the next update to the blockchain is
verified. This will eliminate the need for post-trade approvals, confirmations and
central clearing during the settlement cycle, and reduce the scope for data errors,
disputes and reconciliation lags, thereby speeding up the end-to-end process.
(3) Trusted Automation of Contractual Relationships (e.g. Smart Contracts)
As seen, smart contracts allow for the automated processing of contractual
relationships and changes to the status of assets on a distributed ledger. This
concept has given rise to the notion of “smart bonds”, i.e. securities that can
automatically perform corporate actions and cash events (interest payments,
redemption of notional amounts at maturity, segmentation, knock-out events,
etc.).
The possibility of programs receiving external inputs on the blockchain
suggests that external events (e.g., goods received) that may change the state
4.3 Legal Basis of Digital Debt Instruments 93
transition of a given digital asset (e.g., if good goods are received and then
20,000 dollars are returned to the supplier ELSE) would reduce or eliminate
risk in counter-party trading relationships.
(4) Immutable Data Storage
Time-stamped events, documents or any type of asset in an ongoing digital
chain stored in the network provides the ability to store immutable data. The
data is distributed among the participants and no one participant can delete it.
An immutable transaction history also provides a chain of ownership within the
supply chain, and a clear indication of provenance and allows the tracking of
transacted products.
(5) Transparent Real-time Data
According to a recent work report by Oliver Wyman and Euroclear, the main
benefit of this technology in the financial sector comes from its ability to provide
transparent real-time data. This specificity of blockchain can eliminate the need
for data enrichment (e.g. matching trade data to settlement data), reconcilia-
tion between counter-parties and dispute resolution. Participants can optionally
disclose trusted data to other counter-parties before the time of the transaction
to increase certainty of their value and thus reduce risk or credit exposure.
4.3 Legal Basis of Digital Debt Instruments
4.3.1 Meaning and Scope of Instruments
Definition of Instruments
In a broad sense, instruments refer to all kinds of securities and credentials, such as
bonds, shares, bills of lading, treasury bills, invoices, etc. The rights created by an
instrument in the narrower sense are only monetary claims, whereby the holder of
the instrument may claim payment from the specific debtor of the instrument for a
specified amount of money recorded in the instrument.
The scope of instruments in a narrow sense is defined by the Instruments Law of
the People’s Republic of China. According to Article 2 of the law, instruments refer
to bills of exchange, promissory notes and cheques. Therefore, in the narrow sense
of the term, it refers only to a document of value issued by the drawer in accordance
with the Instruments Law of the People’s Republic of China, in which the drawer
pays a definite amount unconditionally or entrusts another person to pay a definite
amount unconditionally to the drawee or bearer.
Functions of Instruments
Instruments have four main functions: Payment, settlement, credit and financing.
Classification of Instruments
A draft is an instrument issued by the drawer, entrusting the drawee to pay a definite
amount unconditionally to the payee or holder at sight or on a specified date. A
Fig. 4.5 Classification of instruments
bank draft is an instrument issued by the drawer’s bank, which unconditionally pays
to the payee or holder at sight in accordance with the actual settlement amount. A
commercial draft is an instrument issued by the drawer, who entrusts the drawee to
make an unconditional payment of a specified amount to the payee or holder on a
specified date.
A cheque is an instrument issued by the drawer, entrusting the bank or other
financial institution handling cheque deposits to pay an unconditional amount to the
payee or holder at the time of presentation of the cheque.
A promissory note is an instrument issued by the drawer promising to pay an
unconditional amount to the payee or holder at the time of presentation (Fig. 4.5).
Bills of Exchange, Promissory Notes and Cheques

The differences between a bill of exchange, a promissory note and a cheque are shown
in the Table, depending on the parties to the instrument, the drawer, the principal
debtor, the drawee, the acceptance on security for payment and the maturity of the
instrument (Table 4.3).
Commercial Acceptance Drafts and Bank Acceptance Drafts

A commercial acceptance draft is an instrument issued by the drawer and accepted
by the drawee, or issued and accepted by the drawee.
A banker acceptance draft is an instrument issued by a depositor who has a
deposit account with the accepting bank and accepted by the accepting bank to pay
an unconditional amount to the payee or holder on a specified date.
A commercial acceptance draft is accepted by a drawee other than a bank; the
bank acceptance draft are accepted by a bank. The creditworthiness of the acceptor
further affects the creditworthiness and recoverability of the instrument.
Paper and Electric Instruments

In accordance with the legal requirements, matters to be listed in the paper instru-
ment are classified into absolute and relative statements. If absolute matters are not
recorded, the instrument is invalid. According to Article 22 of the Instruments Law of
Table 4.3 Comparison of bills of exchange, promissory notes and cheques
Types of instrument Parties Drawers Main debtor Drawee Acceptance on Term
security for
payment
Bills of Commercial draft Drawer, drawee, Enterprises Drawer Entrusting another Drawer At sight
exchange Bank draft payee Banks Pre-acceptance—drawer person to make a Drawer or acceptor At sight or
Post-acceptance—drawer payment (if there is an time
4.3 Legal Basis of Digital Debt Instruments
acceptor)
Cheques Drawer, drawee, Enterprise or Drawer Entrusting another Drawer At sight
payee individuals person to make a
payment but the
trustee is limited to
a bank or other
statutory financial
institutions
Promissory notes Drawer, drawee, Banks Drawer Drawer Drawer At sight
payee
95
the People’s Republic of China, a draft must contain the following particulars: (1) the
word “draft”; (2) an unconditional mandate to pay; (3) a fixed amount; (4) the name
of the drawee; (5) the name of the payee; (6) the date of issue; (7) the signature (seal)
of the drawer. If the draft does not contain one of the said matters, the draft shall
be void. Relative recorded matters not recorded, the provisions of applicable law
shall prevail. According to Article 23 of the Instruments Law of People’s Republic
of China, the date of payment, the place of payment, the place of issuance and other
matters on the draft, if any, shall be clear and unambiguous. If the date of payment
is not recorded on the draft, the draft is payable at sight. If the place of payment is
not recorded on the draft, the place of business, residence or habitual residence of
the drawee shall be the place of payment. If the place of issuance is not recorded on
the draft, the place of business, residence or habitual residence of the drawer shall
be the place of issuance.
An electronic commercial draft is an instrument that the drawer produces in
the form of a data message via the electronic commercial draft system, and entrusts
the drawee to unconditionally pay a definite amount to the payee or holder on a
specified date. Electronic commercial drafts are divided into electronic bank accep-
tance drafts and electronic commercial acceptance drafts. Electronic bank accep-
tance drafts are accepted by banking financial institutions and finance companies;
electronic commercial acceptance drafts are accepted by legal persons or other orga-
nizations other than financial institutions. The drawee of an electronic commercial
draft is the acceptor.
Electronic Commercial Draft System (ECDS) is a business processing platform
approved by the People’s Bank of China, which relies on network and computer
technology to receive, store and send data messages of electronic commercial drafts,
and provide services related to the payment of currency and liquidation of funds by
electronic commercial drafts. ECDS is only applicable to undiscounted drafts: the
post-discount business of ECDS was switched to the trading system of Shanghai
Commercial Paper Exchange from October 1 to October 7, 2018, and the post-
discount business function of the former ECDS was closed.
The categories of parties to electronic commercial draft business are as follows: (1)
financial institutions whose access agencies directly access the electronic commercial
draft system; (2) financial institutions whose agents handle electronic commercial
draft business through the access agencies; (3) legal persons and other organizations
other than financial institutions. When access institutions provide business service
of electronic commercial drafts, legal persons and other organizations other than
principals and financial institutions shall open an account in access institutions when
handling electronic commercial draft business.
The differences between electronic instruments and paper instruments are shown
in Table 4.4:
Basic Nature of Instrumental Behaviors

Non-causative nature An instrument is usually granted on the basis of the existence
of an underlying relationship, but once a credit/debt relationship is established on the
instrument, it is not affected by the existence or validity of the underlying relationship.
Table 4.4 Differences between electronic instruments and paper instruments

Items Differences
Carrier Data message forms instead of physical paper instruments
Signature and seal Electronic signatures instead of physical signatures
Delivery Sending and signing of data messages instead of traditional means of
delivery as a legal constituent element of the transfer of rights
Acceptance Extension of the scope of acceptors of electronic bank acceptance drafts
to finance companies
Term Extension of maximum payment term from six months to one year
Amount All commercial drafts with a single amount of more than 10,000 yuan
should be handled as electronic drafts
Formality Instruments are strictly formal documents of value and the forms of
bill behavior, that is, the contents and methods of statement, are clearly stipulated by
law. If they do not conform to the statutory forms, they will constitute formal defects,
which will lead to the invalidity of instruments or the instrumental behavior.
Independence Where there are several behaviors on an instrument, each is inde-
pendent and the validity of one behavior is not affected by the validity of other
behaviors.
Contextuality The legal relationship on an instrument is governed solely by
the statement on the instrument. An instrument behavior takes the record on the
instrument as the content of intention expression, and the actor is liable for what is
written on the instrument. Even if there is a discrepancy between what is written on
the instrument and what is actually happening outside the instrument, what is written
on the instrument still prevails.
4.3.2 General Legal Issues on Operation of Instruments
Acquisition of Instrument Rights

There are two types of acquisition of instruments, original acquisition and succession
acquisition, original acquisition being divided into acquisition by issuance and bona
fide acquisition, acquisition by issuance being the acquisition of an instrument by the
issuance of an instrument from the drawer, and bona fide acquisition being the bona
fide acquisition of an instrument from a non-disposing person by means of transfer as
provided for in the Instruments Law of the People’s Republic of China. Succession
acquisition refers to the acquisition of an instrument through endorsement, payment,
discount, inheritance, grant, merger or demerger of companies, etc.
Bona fide Acquisition of Instruments

Article 12 of the Instruments Law of the People’s Republic of China stipulates that
a person who acquires an instrument by fraud, theft or coercion, or who acquires a
instrument in bad faith, knowing that there is a foregoing situation, shall not enjoy
the rights of the instrument. If a holder obtains an instrument that does not conform to
the provisions of the Law due to gross negligence, the holder shall not enjoy the right
to the instrument. This means, in particular, that the instrument was acquired from
a person without rights, i.e. the endorser is a person without rights; the instrument
was transferred by endorsement or by mere delivery; there was no bad faith or gross
negligence; and the consideration was paid.
Exercise of the Right to Defend Instruments

There are two types of right to defend instruments, namely, defense in rem and defense
in personam. The defense in rem include the failure of an instrumental behavior, such
as a deficiency in the statement contents of the instrument, an incapacity of the debtor
of the instrument, unauthorized agency, instrument behaviors in excess of authority
of agency, or the presence of a prohibited matter on the instrument; an inability to
make a claim on the basis of the instrument, such as an unexpired instrument or
a discrepancy in the place of payment; extinguishment or invalidity of the rights
set out in the instrument, specifically, extinguishment of the creditor’s rights of the
instrument due to payment, offset, deposit, exemption, invalidating judgement and
expiration of time limit; the preservation procedures of instrument rights are lacking,
such as the failure to make a certificate of protest; there is forgery or alteration on the
instrument. The defense in personam refers to the creditor’s rights and debts between
the direct parties.
Statement and Signing/Sealing of Instruments

Absolute statements According to Article 22 of the Instruments Law of the People’s
Republic of China, an instrument must bear the following particulars: (1) the word
“draft”; (2) an unconditional mandate to pay; (3) a fixed amount; (4) the name of the
drawee; (5) the name of the payee; (6) the date of issue; (7) the signature (seal) of the
drawer. If the draft does not contain one of the said matters, the draft shall be void.
Relative statements According to Article 23 of the Instruments Law of People’s
Republic of China, the date of payment, the place of payment, the place of issuance
and other matters on the draft, if any, shall be clear and unambiguous. If the date of
payment is not stated on the draft, the draft is payable at sight. If the place of payment
is not stated on the draft, the place of business, residence or habitual residence of
the drawee shall be the place of payment. If the place of issuance is not stated on the
draft, the place of business, residence or habitual residence of the drawer shall be the
place of issuance.
Invalid statements According to Article 24 of the Instruments Law of the People’s
Republic of China, a draft may state other issues other than those stipulated in the
Law, but the stated issues do not have the effect of the draft.
Beneficial statements The first is the “no transfer” statements. According to
Article 48 of the Provisions of the Supreme People’s Court on Several Issues
Concerning the Trial of Instrument Disputes and Article 27 of the Instruments of
the People’s Republic of China, if the drawer of an instrument states “not transfer”
on the instrument and the instrument holder endorses and transfers the instrument,
the endorsement shall be invalid. The transferee after the endorsement and transferee
shall not enjoy the rights of the instrument and the drawer or acceptor of the instru-
ment shall not be liable to the transferee. The second is the statement of the type of
currency of payment.
Non-beneficial statements Firstly, an statement that does not have the effect of
an instrument but has the effect of civil law. The civil law effect is limited to the
direct parties and does not apply to other parties; secondly, a statement not deemed a
statement by virtue of the provisions of the Instruments Law of the People’s Republic
of China; thirdly, an statement that can have the same effect under the provisions
of the Instruments Law of the People’s Republic of China even if it is not on the
instrument.
Harmful statements Statements may render an instrument invalid themselves.
For example, the drawer of a draft states a condition on the draft for entrusted
payment, which conflicts with the essence of the instrument, so the Instrument Law
of the People’s Republic of China eliminates such harmful statements by making the
instrument invalid.
There are specific requirements for signatures and seals on an instrument.
According to Article 41 of the Provisions of the Supreme People’s Court on Several
Issues Concerning the Trial of Instrument Disputes, if the signature and seal of the
drawer on the instrument does not comply with the Instruments Law of the People’s
Republic of China and the following provisions, they shall have no effect under the
Law: (1) The signature and seal(s) of the drawer on a commercial draft shall be the
financial seal or official seal of the legal person or the entity concerned, the signature
or seal of its legal representative, responsible person or authorized agent; (2) The
signature and seal(s) of the drawer of a bank draft and the signature and seal(s) on
a bank acceptance draft shall be the special seal for bank drafts, or the signature or
seal of its legal representative or authorized agent; (3) The signature and seal(s) on
a bank’s promissory note shall be the special seal of the bank for promissory notes,
the signature or seal or seal of its legal representative or authorized agent; (4) the
signature and seal(s) on a check shall be, if the drawer is an entity, the financial
seal or official seal, or the signature or seal of its legal representative or authorized
agent consistent with those reserved in the bank, or if the drawer is an individual, the
signature or seal of the individual reserved in the bank.
4.3.3 Instrumental Behaviors
The core instrumental behaviors are acceptance, issuance, payment and endorsement.
Drafting
According to Article 20 of the Instruments Law of the People’s Republic of China,
the issuance of an instrument is the behavior of issuing the instrument and delivering
it to the payee. According to Article 21 of the Instruments Law of the People’s
Republic of China, the drawer of a draft must have a genuine entrusted payment
relationship with the drawee and a reliable source of funds to pay the amount of
draft. It is prohibited to issue a draft without consideration to obtain funds from

banks or other parties to the draft. According to Article 26 of the Instruments Law
of the People’s Republic of China, the drawer who issues a draft shall assume the
responsibility of guaranteeing the acceptance and payment of the draft. The drawer
shall reimburse the holder for the amount and expenses stipulated in Article 70 and
Article 71 of the Law when the draft is not accepted or paid.
With regard to the issuance of the draft, the drawer should note that if the consid-
eration is paid by the first-hand holder after the issuance, the drawer cannot use
this as a defense to the refusal to pay by the holder after the first-hand holder has
endorsed the bill. The first-hand endorser is required to check the completeness and
validity of the statements, and if the necessary statements are missing, the instrument
is invalid; the instrument must be issued and obtained in a genuine transaction and
debt relationship and for a reasonable consideration.
Endorsement
the holder of a draft may transfer its draft rights to another person or grant certain
rights to another person to exercise. The holder shall endorse and deliver the draft
when exercising the rights stipulated in the first paragraph. Endorsement refers to
the act of stating relevant matters on the back of the draft or the allonge and signing
and sealing the draft. As to the statement, the endorsement shall be signed by the
endorser and the date of the endorsement shall be stated. If the date of endorsement
is not stated, the endorsement is deemed to be made before the maturity date of the
draft. Article 33 of the Instruments Law of the People’s Republic of China stipulates
that no conditions shall be attached to the endorsement. If conditions are attached to
the endorsement, the conditions attached shall not have the effect on the draft. An
endorsement that transfers a part of the amount of the draft or an endorsement that
transfers the amount of the draft to more than two persons is invalid.
Pledge
A draft may be pledged, and the word pledge shall be stated on the draft in an
endorsement. The endorsee may exercise the right of the draft when realizing its
pledge right in accordance with the law. According to the provisions of Article 35(2)
of the Instruments Law of the People’s Republic of China, when a draft is pledged
and the pledgor only states the word pledge on the draft without signing it, or the
pledgor does not state the word pledge on the draft or the allonge and signs a separate
pledge contract or pledge clause, it does not constitute a pledge of the draft. The Law
of the People’s Republic of China on Property Rights stipulates that drafts, cheques,
promissory notes, etc. that the debtor or a third party has the right to dispose of may
be pledged. Parties who pledge drafts, cheques, promissory notes, bonds, certificates
of deposit, warehouse receipts and bills of lading shall conclude a written contract.
The right of pledge is established when the document of title is delivered to the
pledgee, and the right of pledge without the document of title is established when the
pledge is registered by the relevant department. As for drafts, cheques, promissory
notes, bonds, certificates of deposit, warehouse receipts, bills of lading, the date
of encashment or withdrawal of goods, the pledgee whose date is earlier than the
maturity of the principal creditor’s right may cash or take delivery of the goods, and
agree with the pledgor to pay off the debts or deposit the cashed payment or the
extracted goods in advance.
Discounting
According to Article 2(2) of the Interim Measures for the Administration of Accep-
tance, Discounting and Rediscounting of Commercial Drafts, discounting refers to
the instrument behavior of paying a certain amount of interest and transferring the
rights of a commercial draft to a financial institution in order to obtain funds before the
maturity date of the draft. It is a way for financial institutions to finance the holder
of the draft. According to Article 9 of the General Rules for Loans, discounting
of instruments refers to loans granted by lenders in the form of purchasing the
borrower’s outstanding commercial drafts. Article 93 of the Measures for Payment
and Settlement requires that holders of eligible commercial drafts apply to banks for
discounting with the outstanding commercial drafts and the discounting vouchers.
Discounting banks may rediscount outstanding commercial drafts to other banks, and
may also apply to the People’s Bank of China for rediscounting. When discounting
or re-discounting, the transfer endorsement shall be made and a copy of the VAT
invoice and the commodity shipment document between the discounting applicant
and its direct predecessor shall be provided.
Acceptance
acceptance refers to the instrumental behavior of the drawee promising to pay the
amount of a draft on its due date. With regard to the statement of acceptance, when
the drawee is requested to accept the draft under Article 42 of the Instrument Law
of the People’s Republic of China, the word acceptance, date of acceptance shall
be stated on the front side of the draft, and signature and seal shall be attached to
the draft. The draft with regular payment at sight of the draft shall state the date of
payment at the time of acceptance. If the draft does state the date of acceptance,
the last day of the period specified in the first paragraph of the previous article is
deemed the date of acceptance. The acceptance of the draft by the drawee shall not
be accompanied by conditions, or it will be considered as a refusal to accept. The
drawee shall accept the draft and then assume the responsibility of payment when it
is due.
Payment
the holder shall demand payment in accordance with the following deadlines: (a)
within one month from the date of issuance of the draft payable at sight to the
drawee; (b) within ten days from the date of maturity of the draft payable on a
fixed date, payable periodically after issuance or payable periodically at sight to the
acceptor. Presentation of payment to the drawee through an entrusted receiving bank
or through a clearing system shall be deemed as presentation of payment by the
holder. The drawee must pay in full on the same day if the holder advises payment
in accordance with the provisions of the preceding article. If the holder is paid, he
shall sign on the draft and hand it over to the drawee. If the holder entrusts a bank to
receive the payment, the entrusted bank shall be deemed to have signed the receipt
when it transfers the collected amount of the draft into the holder’s account. After
the drawee has paid in full in accordance with the law, the liability of all the debtors
of the draft is discharged.
4.3.4 Other Legal Issues in Instrument Business
Instrument Frauds
There are six kinds of instrument fraud: First, forging or altering an instrument;
second, intentionally using a forged or altered instrument; third, issuing a blank
cheque or intentionally issuing a cheque that does not match the signature pattern or
seal reserved for its name to obtain property; fourth, issuing a draft or promissory
note without a reliable source of funds to obtain funds; fifth, the drawer of a draft
or promissory note makes a false statement when issuing the instrument to obtain
property; sixth, fraudulently using other people’s drafts, or intentionally using expired
or invalid drafts for acquisition of property.
Chapter 5
Credit Empowerment Practice Based
on Digital Debt Instruments
5.1 Zhongjin Cloud: X Credit
5.1.1 Introduction of Zhongjin Cloud
Founded in 2013, Zhongjin Cloud is a leading provider of information technology

solutions for the financial industry in China, with a core team from well-known
financial companies and software enterprises both at home and abroad. They provide
integrated applications and services from consulting and planning to implementation
for hundreds of customers in the fields of finance lease, commercial factoring and
supply chain finance, promote fine management, efficiency improvement and product
innovation, and have been committed to the Chinese dream of “helping industry take
off with Technology Empowered Finance”.
Based on system development, mobile applications, internet, big data and quan-
titative models, the company promotes finance lease, commercial factoring, internet
finance, petty loans and supply chain finance.
5.1.2 Introduction to the X Credit Model
The main sources of capital for core enterprises in the supply chain include endoge-
nous financing and exogenous financing: endogenous financing mainly refers to the
enterprise’s own capital and the capital accumulated in the process of production
and operation; exogenous financing mainly includes direct financing and indirect
financing (from banks, non-bank financial institutions). All financing methods can
be applied and many are available at a low cost. Due to their large size and high
quality assets, it is relatively easy to apply for bank loans and credit facilities. At the
end of the year, core enterprises usually need to settle their accounts with suppliers
and are under pressure to make payments.

https://doi.org/10.1007/978-981-19-3513-8_5
104 5 Credit Empowerment Practice Based on Digital Debt Instruments
SMEs in the supply chain also have access to bank credit, finance lease, accounts
receivable financing and private lending. The financing options seem to be many,
but they are very difficult to obtain, because SMEs do not have a high credit rating,
which makes financing not feasible, or feasible but costly. MSMEs are under a lot
of pressure to survive, and the root cause of all this pressure is financial pressure. If
an enterprise has sufficient capital, many problems can be solved.
Further, the main challenges faced by the core enterprises in the supply chain
are: Excessive rigid interest-bearing liabilities/loan financing may affect the overall
financial performance of the group; it is necessary to practice the “integration of
industry and finance” to further explore the overall profitability of the supply chain,
but the lack of appropriate business systems, platforms and professional staff, and
the high cost of risk control makes it unworkable; they need to enhance supply chain
control, strengthen the competitiveness of the supply chain system, and improve the
overall profitability. The biggest problem faced by SMEs in the supply chain is the
difficulty and high cost of financing, which is reflected in the high cost of financing,
small amount of financing, extremely limited financing channels, weak financial
strength, poor solvency and low capital turnover rate.
From the above pain points faced by core enterprises and SMEs, supply chain
finance solutions are feasible and necessary. Buyers in the supply chain are under
pressure to pay, and often face a dilemma: If they pay on time, core enterprises
are under pressure; if they do not pay on time, the relationship between buyers and
suppliers will be strained. If the sellers wait too long to receive payment, their cash
flow and production operations will be affected, which in turn increases the risk of the
supply chain, and may lead to high interest rate loans, further increasing the pressure.
Tension between the buyer and the seller can undermine the stability of the supply
chain. The intervention of supply chain finance can greatly reduce risks and solve
the capital flow problem faced by both parties. Supply chain finance solutions can
optimize the industry chain, shorten the cash flow cycle and enable all stakeholders
to achieve higher business performance at a lower cost of capital. All the effects are
finally reflected in speeding up the circulation and improving the efficiency of funds.
Supply chain finance, complex and multifaceted, requires a suitable entry point
to develop its business. The business scope of supply chain finance, which covers
the businesses of accounts receivable, inventory and prepayment, with the inventory
business including inventory pledge and warehouse receipt pledge financing, has high
requirements for physical transactions and is difficult to control risks. The premise
of accounts receivable business is to ensure the authenticity of the underlying trade
background, and the business is relatively easy to enter.
An important form of supply chain finance for account receivables is factoring,
and there are two main types of factoring, namely forward factoring and reverse
factoring. Forward factoring relies on the credit of the holder of the receivables,
while reverse factoring is relying on the credit of core enterprises. When financing
for a supplier is required, the financial institution will assess the credit entity, and
once the credit entity is deemed to be under-credited, a core enterprise, as a buyer
(payer) of the supplier, is needed to confirm creditor’s rights, after which the payment
will be fulfilled during a fixed period of time, so the supplier can be financed with
5.1 Zhongjin Cloud: X Credit 105
the authority from the core enterprise. This is the reverse factoring model, which
relies on the credit of the core enterprise. However, there are problems with reverse
factoring, as the supplier need the core enterprise to confirm its creditor’s rights when
it applies for financing, there may be a lack of motivation and cooperation from the
core enterprise. For example, if a 90-day term is set between the buyer and seller,
the core enterprise may delay the payment date if it has not confirmed the creditor’s
rights, because once the rights are confirmed, the payment time is fixed and cannot be
extended due to the intervention of financial institutions, and payment must be made
on time. This is one of the biggest shortcomings of traditional reverse factoring, as
it can leave core enterprises unmotivated and therefore this business format needs to
be improved (Table 5.1).
Reverse factoring is a very good business model for supply chain finance. In
foreign countries, the credit system is very well developed and reverse factoring is
working well. The problem faced by domestic reverse factoring business is how the
core enterprises can cooperate with the confirmation of creditor’s rights. Zhongjin
Cloud relies on the power of fintech to solve this problem. Under the “X Credit”
model, the core enterprises cooperate to pre-pose the confirmation of creditor’s rights
for reverse factoring. Unlike the traditional model where the supplier needs the core
enterprise to take the initiative to confirm the creditor’s rights, the X Credit model is
equivalent to the core enterprise changing the payment method when settling for the
supplier. X-Credit is similar to a commercial draft in terms of function and attributes,
but it is unique in that it is based on a platform for splitting and transfer. X Credit
Table 5.1 Changes in the way supply chain finance is conducted

Traditional forward Traditional reverse Reverse factoring of
factoring factoring the X Credit model
Features of the model Difficult to assess Requires confirmation Supplier financing is
based on the of creditor’s rights simplified from two
creditworthiness of the from core enterprises, steps to one, leaving
seller; difficult to ensure no need for
Difficult to verify the willingness to re-confirmation of
authenticity of cooperate and creditor’s rights from
transactions; efficiency of approval; core enterprises;;
High cost and long Only provides credit suppliers may go
lead time for on-site enhancement services beyond the level and
due diligence; for Tier 1 suppliers; penetrat service;
Long internal loan Uncertainty of Multi-tier suppliers
review cycle; high accounts receivable with fixed terms and
overall risk; period, subject to high supplier
Difficult to batch confirmation of rights acceptance;
business; by core enterprises; Low cost, high
High seller financing High cost, core supplier loyalty; low
costs enterprises’ profit risk due to credit
sharing; enhancement by core
Time-consuming and enterprises;
low efficiency in High timeliness makes
process coordination T + 0 loans possible
Fig. 5.1 X Credit model (electronic credit vounchers). Source Zhongjin Cloud
is issued by the core enterprise, with the creditor’s rights confirmed upfront, and
the first-tier supplier holds X credit and can initiate financing at any time. As the
core enterprise is the issuer of X Crediting, the factoring company does not need to
confirm the creditor’s rights with the core enterprise again. The X Credit model is
a very efficient way to settle funds without changing the business model of reverse
factoring and without the need for the core enterprise to confirm creditor’s rights,
which solves the problem of the core enterprise not cooperating with the confirmation
of creditor’s rights (Fig. 5.1).
The term “group” refers to large core enterprises, including central enterprises,
large state-owned enterprises, large listed companies, etc. After a core enterprise has
obtained credit from a bank, it will allocate the credit line to its members, who will
then be able to issue an X Credit, and each platform can be named independently; after
the supplier receives the X Credit, if it is not re-transferred, the platform will definitely
repay the supplier on the due date; if a holder of any level needs to pay the supplier at a
higher level, the X Credit can be transferred at each level, i.e. the transfer of creditor’s
rights; any holder can initiate financing on the platform, i.e. reverse factoring. After
the factoring company buys the assets, if there is a shortage of funds, it can further
sell the assets to financial institutions, such as banks and securities companies, i.e.
re-factoring, ABS, ABN business, which is the core process of the complete supply
chain finance scenario based on the X Credit model. Once an X Credit is issued by
a member within the core group, it needs to be rigidly repaid upon maturity. If the
member fails to repay the loan when it is due, the group has to advance the loan and
pay on behalf of the member. Many of X Credits currently available in the market
are highly sought after and are underpinned by a systematic agreement at the bottom
layer. For example, if company A purchases goods from company B, Party A issues
an X Credit to Party B. After company B (tier 1 supplier) signs for it, the X Credit can
be transferred to an upstream (tier 2) supplier, and the upstream (tier 2) supplier can
continue to transfer it to tier 3 suppliers and end-suppliers, and any supplier holding
an X Credit can initiate financing. The X Credit can be split and transferred at any
time, and financing services are available through factoring companies and banks.
At the heart of this supply chain solution is the X Credit, a digital credit voucher
product. The digital voucher has three characteristics: Firstly, it is an electronic credit
voucher issued by the core enterprise to the supplier that reflects the credit/debt
relationship between the two parties to the underlying contract. Secondly, it provides
a new settlement method for enterprises in the industry chain of core enterprises,
characteristic of high credit, splitability, transferability, financing, flexibility and
convenience in use and controlled risk. Thirdly, it supports suppliers to raise funds or
hold to maturity, and provides SMEs with a new channel for efficient and convenient
financing.
The X Credit model has many features: Firstly, it does not change the nature of
the reverse factoring business, but simplifies the financing process for suppliers via
pre-posing the confirmation of creditor’s rights by core enterprises; secondly, it can
serve more than one tier of suppliers, and penetrate through to serve more tiers of
suppliers, thus providing a broader range of services; thirdly, the payment period
is locked when an X credit is issued, which improves the acceptance of suppliers;
fourthly, it improves the business loyalty. As all X Credits are issued by the core
enterprises, the core enterprises have made credit enhancement in advance, so the risk
factor is relatively low, which can provide better services to suppliers and increase
the loyalty of suppliers; Fifth, it strengthens the timeliness. Internet-based supply
chain finance business, if there are no force majeure factors, can shorten the lending
time and effectively guarantee the timeliness.
5.1.3 Business Essence and Legal Basis of the X Credit

Model
The credit/debt relationship corresponding to an X Credit is recognized and protected

by Chinese laws. The X Credit is the evidence of the credit/debt relationship between
the core enterprise member and its underlying counter-party arising from the under-
lying transaction. If there is a genuine and legal trade relationship between the core
enterprise member and its underlying counter-party, the relevant underlying contract
is genuine, legal and valid, the underlying contract corresponding to the X Credit
is recognized and protected by Chinese laws, and the credit/debt relationship corre-
sponding to the X Credit is also recognized and protected by Chinese laws. Once an
X Credit is issued, the credit/debt relationship of the X Credit is confirmed in writing
by the issuer and the recipient of the X Credit.
The creditor’s rights corresponding to the X Credit are transferable. The creditor
may assign its legally held creditor’s rights to a third party without the prior consent
of the debtor, except in cases provided for by law. Since the creditor’s rights to which
the X Credit relates is transferable, the transfer of the X Credit, as a voucher of
the creditor’s rights, is also permitted by law and is essentially an assignment of
the creditor’s rights to which it relates, provided that an agreement is made in the
corresponding contract to exclude the circumstances in which the creditor’s rights
cannot be transferred.
The transfer of an X Credit is essentially a mutual set-off of debts and credits.
According to Article 99 of the Contract Law of the People’s Republic of China, if
the parties have debts due to each other and the subject matter of such debts is of
the same kind and quality, either party may set off its own debts against the debts
of the other party, except where such set-off is not permitted in accordance with
the provisions of law or the nature of the contract. If a party claims set-off, it shall
notify the other party. The notice shall take effect when it reaches the other party. The
set-off may not be subject to conditions or periods of time. The transferor transfers
the X Credit held by it to its supplier as a payment and settlement method, and the
transferor offsets its monetary debt arising from accepting the services or goods from
the transferee under a trade contract by means of X Credit transfer. Therefore, the
transfer of X Credit is essentially an act in which the creditor’s rights and debts of
the transferor and the transferee offset each other, and the transferee does not need
to pay the transfer consideration to the transferor for the transfer of the X credit.
X Credit financing is a legal commercial factoring. A factoring company is a
commercial entity qualified to provide services such as factoring agency and receiv-
ables management, collection and financing. The transfer of the outstanding X Credit
from the holder to the factoring company, and the provision of financing by the
factoring company to the holder and the collection of interest on the financing, is in
essence the transfer of the receivable claims under the X Credit from the holder to
the commercial factoring company, and the provision of financing by the commer-
cial factoring company to the holder. Therefore, X Credit financing is essentially a
kind of commercial factoring, which is recognized and protected by the laws and
regulations of China.
The factoring company can also apply to the bank for re-factoring of its trans-
ferred X Credit, which is essentially the factoring company applying to the bank
for commercial bank factoring of its receivable claims. The Interim Measures on
Factoring by Commercial Banks do not prohibit commercial banks from engaging
in refactoring business.
5.1.4 Value of the X-Credit Model
Service Value for Core Enterprises

The service value of the X Credit to core enterprises is sixfold: The first is the
promotion of commercial credit, i.e. helping the group to promote commercial credit,
increasing the loyalty of suppliers at all levels to core enterprises; the second is
effective solution of the problem of triangular debts and enhanced liquidity through
the transfer of X Credits; the third is reduced financing cost for suppliers. Bargaining
with financial institutions as a whole based on the credit enhancement role of core
enterprises helps to reduce the cost of financing for suppliers and provides them
with fast access to financing to ensure the stability of upstream and downstream
companies in the supply chain; fourthly, it can optimize the group’s statements,
including revitalizing the capital stock, enhancing capital liquidity, reducing the
group’s overall interest-bearing liabilities, and obtaining financial income through
factoring financing business; fifthly, the X Credit can solve the problem of instrument
payment, i.e. solving the problem that traditional commercial drafts cannot be split
for transfer and financing; sixth, it establishes a benign capital channel, a new mode
of cooperation between groups and financial institutions, and introduces a new capital
channel for the core enterprise ecosystem.
Service Value for Suppliers

The value of the X Credit for suppliers is mainly in reducing the cost of supply chain
financing. First, it enables the credit of high-quality enterprises to benefit the whole
supply chain; second, it enables all enterprises in the supply chain to obtain low-cost
financing; thirdly, it drives down the overall cost of the supply chain; fourthly, it
reduces the transaction cost of the supply chain.
Service Value for Funders

The value of the X Credit for funders is as follows: The first is to expand the long-tail
market through transfer of credit from core enterprises; the second is to obtain value-
added profits, and obtain profits from online bulk financing by revitalizing the idle
credit of large enterprises; the third is to serve the real economy, and truly achieve
inclusive finance by serving MSMEs.
Establish a Benign Supply Chain Financial Ecosystem

The X Credit enables suppliers/distributors to quickly achieve financing based on
credit enhancement from core enterprises, which stabilizes the supply chain of core
enterprises, improves their competitiveness and increases their revenue, and realizes
the “integration of industry and finance”; supports commercial banks/financial insti-
tutions to achieve safe funding business, increases their customer base and improves
their revenue; and also enables the X Credit platform itself to gain platform revenue
and provide services to the supply chain. Through mutual benefit and reciprocity, it
is possible to achieve a win–win situation for all parties.
Facilitate the Transformation and Upgrading of Traditional Supply Chain

Finance
The development of supply chain finance business will help the transformation and
upgrading of the whole supply chain ecosystem. Firstly, from the perspective of
supply chain entities, it will change the perspective of competition between enter-
prises to that between supply chains, which will help form a stable supply chain
system and promote the collaborative development of enterprises in the supply
chain. Secondly, through the supply chain finance model, the capital channels can
be expanded to form a stable flow of funds, thus enhancing the bargaining power of
the platform. Thirdly, as long as we can effectively control the core enterprises and
ensure the authenticity of transactions, the risk of the whole system can be controlled.
Fourthly, at the corporate strategic level, supply chain finance is also a breakthrough
to promote the parallel advancement of industry and finance and form a big data
system penetrating the supply chain.
5.1.5 Current Market Development of the X Credit Model
At the market level, the X Credit is currently entering the market through platformiza-
tion. There are several forms of platformization, the first is core enterprise led, the
second is bank led, and the third is a third party platform model, which usually brings
in third party core enterprises into the platform. Supply chain finance also needs to be
positioned in the future, and this involves model selection. The threshold for supply
chain finance is high, and enterprises can only build their own platforms if they reach
a certain scale. If the size is not up to standard, they will choose to join a third party
platform instead of building their own.
5.1.6 Dilemma of the X Credit Model
The supply chain finance platform needs to coordinate with many third-party insti-
tutions, such as bank account systems, CA systems, invoice verification systems,
SMS, ERP, etc. It also involves the coordination with banks and the intervention of
law firms, etc. The construction of the supply chain finance platform is a systematic
project for market-oriented services, and the complex coordination puts forward high
requirements on technology and communication abilities.
Supply chain finance can do traditional reverse factoring, of which the threshold
is relatively low, while the supply chain finance platform of the X Credit model has a
relatively high threshold. What are the key factors to consider when building future
platforms? First of all, a self-assessment is needed: Firstly, whether the scale of assets
is sufficient. The X credit model needs to have a certain volume as a support, when the
volume reaches billions of yuan or even tens of billions of yuan, this model is a better
choice; secondly, whether the core enterprise’s own credit is sufficient to support the
X Credit model, as the model is based on corporate credit; thirdly, whether the form of
the enterprise’s supply chain is suitable for the X Credit model, and whether suppliers
accept this model; the fourth is the payment of accounts receivable. Some large core
enterprises have sufficient funds, and the funds can be delivered to the suppliers
in a timely manner, while the X Credit model is more suitable for enterprises with
accounts receivable payment period of more than 2 months; the fifth is the cost
acceptability of the suppliers, and it is necessary to carry out financing business
based on the calculation of revenue, output ratio and the acceptable cost range of the
suppliers; the sixth is the business driving force. Supply chain finance is a systematic
project with the participation of the group, and the business and policy support from
the group may improve overall efficiency; the seventh is the settlement method of
core enterprises, as X Credit and commercial drafts have many commonalities, so all
fields using commercial drafts can be involved in supply chain finance; the eighth is
the profit model, third party costs, including the operation and marketing costs inside
and outside the group; ninth, the construction of a platform operation team needs to
be pre-posed, a complete operation system and operation method shall be formed on
5.2 CSCC: Cloud Credit 111
the basis of a profound understanding thanks to the intervention in the early stage
of system construction; the tenth is the planning for the construction period of the
platform, which is normally 2–3 months. In addition, the system construction has
a prerequisite, namely how to choose a third-party service support provider, and
there is a difference between newly introduced third-parties and those with previous
experience.
5.2 CSCC: Cloud Credit
5.2.1 Introduction of the Enterprise
CSCC (Beijing) Financial Information Service Co., Ltd. (hereinafter referred to as

“CSCC”) is a joint venture established by ten SOEs, namely CRRC, CRCC, Sino-
mach, CASC, CSIC, Anshan Steel, CHALCO, COSCO Shipping, China Merchants
Group, CEEC, CRMSC, two financial institutions, namely Industrial and Commer-
cial Bank of China, Postal Savings Bank of China, 10 local enterprises, namely
Shougang Group, BAIC Group, Shanghai Jiushi, ITG Holding, YTH, Zijin Mining,
Kingdee Software, Zidesen, Beijing Hualian, Yunding Assets, etc., and a state-
controlled mixed ownership enterprise incorporated with the approval of the State-
owned Assets Supervision and Administration Commission (SASAC) of the State
Council. CSCC as a typical business model innovation, is listed as an innovation
and entrepreneurship platform for central enterprises by the SASAC, as well as
an “Internet+” and the central and local collaborative innovation platform strongly
supported by the SASAC.
CSCC aims to provide free supply chain financial management services for large
enterprises with Internet thinking, and is committed to building an industrial Internet
sharing service platform for the collaborative development of large enterprises with
SMEs, banks and financial institutions in the supply chain. By revitalizing the high-
quality credit resources of large enterprises, it can solve the problems of high financial
costs of large enterprises, chain debts of enterprises and difficult and expensive
financing for SMEs, promote the quality improvement of industrial chain enterprises
to increase efficiency and achieve common development.
5.2.2 Market Analysis
The industrial development under the new economic normal is still facing great
pressure, industrial enterprises are facing great development pressure, and some
industries are characteristic of an excessive production capacity, low-end develop-
ment, and serious homogenization. Core enterprises have to transform and upgrade,
as well as increase income and cut costs. Enterprises with relatively weak upstream
and downstream have long payment periods, serious capital pressure, and financial
institutions are also facing an asset shortage dilemma.
The problem of difficult and expensive financing is becoming more and more
prominent.
SMEs occupy an important position in the national economy and are widely
present in various industries with the advantages of their flexible operation, low
organizational costs and convenient transfer capability. As of the end of 2015, there
were nearly 50 million SMEs registered nationwide, accounting for more than 90%
of the total number of enterprises in the country and providing more than half of the
country’s tax revenue and 80% of jobs. In China, most SMEs in China are not publicly
owned, and due to the high cost of loan transactions and monitoring, low credit rating
and lack of collateral assets, it is difficult for them to get credit funds from traditional
banks and other financial institutions. In the face of the current economic situation,
the problem of difficulty and expensive financing of SMEs are even more prominent.
Core enterprises need to increase income, cut costs, and lead the overall industry
upgrade.
The industry is still facing pressure under the new economic normal, and the core
enterprises are facing high costs and low efficiency in the supply chain, declining
profits, high financial costs and debt risks, etc. Specifically, on one hand, the cost
pressure faced by the upstream suppliers will inevitably be transferred to the core
enterprises through different factors such as product price, product quality, efficiency
and service, and it is difficult for the core enterprises to “be unaffected” with their
strong position; on the other hand, core enterprises themselves are also in urgent need
of improving its innovation ability, upgrading themselves to the higher end of the
value chain through concept innovation, model innovation and technological innova-
tion, and at the same time leading the industry in general development and upgrade;
in addition, since the financial crisis in 2008, the central bank has implemented a
loose monetary policy, and Chinese enterprises (especially state-owned enterprises)
have generally been inclined to leverage, the scale of debt has expanded significantly,
and the real economy tends to be highly leveraged.
Financial institutions urgently need to transform and upgrade and explore more
high-quality assets.
In the era of loose monetary policy and high economic growth, financial insti-
tutions have many high-quality assets to choose from, and their risk appetite had
developed the habit of “despising the poor and currying favour with the rich”, and
the risk control mechanisms has been solidified for high-quality assets. However,
when the era of monetary easing ends, financial regulation tightens, economic devel-
opment enters the stage of high-quality growth, the financial habits and mechanisms
formed in the old era cannot adapt to the new needs: on one hand, to satisfy the needs
of the real economy, the new era requires finance to return to its roots, to move away
from the virtual to the real, and to serve the real economy, especially SMEs that play
an important role in the real economy; On the other hand, the decline in profits of
the financial institutions themselves also makes it urgent to increase income, and it
will be difficult to exploit more high-quality assets in times of economic downturn,
leading to elimination sooner or later.
5.2 CSCC: Cloud Credit 113
5.2.3 Solution—Cloud Credit
CSCC is the first nationwide industrial internet + supply chain financial service
platform, which makes full use of the open, cooperative and free internet to inte-
grate enterprise resources, financial resources and supplier resources to create the
“N + N + N” supply chain financial model. On the basis of strict compliance with
the national legal framework, CSCC innovates the “Cloud Credit” product (a kind
of electronic payment commitment letter that can be split, transferred and financed,
which is in essence an receivable and payable claim credential of enterprises based on
real transactions) with the internet thinking and the application practice of counter-
factoring to provide a new option for the confirmation of the right of inter-enterprise
transactions. “Cloud Credit” realizes the credit circulation of large enterprises and
rapid financing for SMEs, allows enterprises at the end of the industry chain, which
cannot be covered by traditional finance, to enjoy the high-quality credit of large
enterprises in the industry chain, gives full play to the long-tail effect brought by
Internet finance, and benefits the majority of SMEs upstream and downstream of the
industry chain.
The idea of Cloud Credit to solve the problem of financing for SMEs is based
on the credit granted by banks to core enterprises, and the platform issues credit
certificates that are used as settlement tools for upstream suppliers in the industrial
chain of core enterprises according to the credit line (Fig. 5.2).
Large enterprises obtain credit support from banks, allocate Cloud Credit
according to the size and risk level of their subsidiaries, and set the maximum amount
of “Cloud Credit” that their subsidiaries can use in the cloud chain financial platform.
Large enterprises activate “Cloud Credit” in the cloud chain financial platform for
free and use “Cloud Credit” to confirm forward accounts payable to suppliers. After
receiving the “Cloud Credit”, suppliers can quickly split and transfer the “Cloud
Credit” held by them to more SMEs in the supply chain, realize zero cost in settle-
ment of chain debts and significantly reduce supply chain transaction costs. At the
same time, suppliers can also carry out low-cost factoring financing on the platform
Fig. 5.2 Schematic diagram of cloud credit model. Source CSCC

with the “Cloud Credit” they hold. Cloud chain financial platform, based on the
standard interest rate determined by core enterprises, and automatically judges the
level of financing interest rate of suppliers according to their types and qualifica-
tions. Cloud chain financial platform transfer the obtained “Cloud Credit” to banks
and financial institutions for financing, so that bank funds can be directed to SMEs
in a safer and more convenient way. After maturity, core enterprises will transfer the
payables to a special bank account opened in their own name for repayment, and
the platform automatically distributes the money to different Cloud Credit holders’
accounts (inter-banking is possible), and the platform only charges a very low service
fee. In the future, based on the “Cloud Credit” circulation data formed by various
enterprise transaction businesses, it is possible to analyze and manage enterprise
credit through a multi-dimensional data analysis model and gradually establish a
dynamic credit rating system for SMEs to solve the credit rating problems of supply
chain and realize enterprise-level internet credit investigation.
The flow of Cloud Credit is essentially a multi-level flow of core enterprise credit
based on the real trade background of the supply chain. By using Cloud Credit for
trade settlement among multi-level suppliers, SMEs in the chain can directly transfer
Cloud Credit to upstream to complete payment and avoid financing from financial
institutions for payment of goods, so overall, it can reduce the total financing demand
of SMEs; for individual SMEs, when they need to “discount” Cloud Credit for
financing, they can achieve lower financing costs supported by the credit rating of
core enterprises. Moreover, it concentrates on solving the problem of small-value and
high-frequency order processing for SMEs through its professional team. At present,
suppliers can submit financing discount applications on the cloud chain platform, and
the money can arrive at the account in 2 h on average.
Cloud Credit has the following significant features: First, it is easy to operate: the
entire registration, income and expenditure flow and even financing are completely
online, so users can enjoy the ultimate customer experience and financial services
without going through too many procedures; second, it is easy to split: after receiving
Cloud Credit, each supplier can independently split it for free and carry out the flow
and financing again; third, it is easy to finance: any level of suppliers may receive
Cloud Credit and provide the contract with the previous buyer online; the third is
easy financing: any level of suppliers receive the cloud letter, provide the contract
and invoice with the previous buyer online, achieve rapid financing, and enjoy the
ultimate customer experience of financing.
5.3 Ouyeel Cloud E-commerce: Tongbao 115
5.3 Ouyeel Cloud E-commerce: Tongbao
5.3.1 Company Profile
Established in February 2015, Ouyeel Cloud E-commerce Co., Ltd. (hereinafter

referred to as Ouyeel Cloud E-commerce) is an integrated steel ecology service plat-
form established by Baowu Group with a new business model from the e-commerce
of bulk commodities. Introducing private capital, overseas capital, employee share-
holding platforms, etc., the first round of equity opening was successfully imple-
mented in May 2017. To further deepen the mixed ownership reform, the company
completed the second round of equity opening with a capital increase of about 2.02
billion yuan.
Based on the concept of “building, sharing, and trustworthiness”, Ouyeel Cloud
E-commerce is customer-centric. By integrating the resources of all the players in
the steel industry chain, it builds a third-party B2B platform that integrates trading,
logistics, supply chain finance, steel technology, big data, information, and other
comprehensive services. Taking a distinctive path in the development of platform-
based supply chain service innovation, it promotes the innovation and practice of
an intelligent supply chain, helping the steel industry reshape the new order of the
steel cycle, giving full play to the market’s decisive role in resource allocation, and
propelling high-quality economic development. The 100 million tons of transaction
volume and 100 billion yuan of transaction amount have enabled a large number
of SME users to obtain efficient and intelligent supply chain services, led to the
transformation, upgrading, and innovative development of the one trillion yuan steel
industry, and provided the entire steel industry chain with a harmonious and symbiotic
ecosystem.
In order to realize the transformation from service-based manufacturing to
production-based service, this platform integrates trading, storage and processing,
transportation, finance, data, technology, information and other services to build
a third-party ecological service system. Specifically, Ouyeel Cloud E-commerce
has built a multi-species and cross-regional commodity market service structure. In
addition to raw fuels, ores, steel, automobiles, shipbuilding, foods, etc., the indus-
trial supply chain is able to offer comprehensive solutions for industrial chain users
through procurement and production, sales, processing, logistics, and other links and
forming a bulk commodity market service base covering the whole industry chain and
integrating four flows. In addition, professional and multi-level risk control methods
are used to ensure the authenticity and safety of the whole transaction and service
process. The company uses professional and multi-level risk control methods to make
sure all transactions and services are authentic and secure. First, it includes a bulk
commodity trading platform around the whole steel industry chain, through which
steel mills and customers are able to cultivate online trading habits, form resource
aggregation, and optimize production and sales. Second, an infrastructure platform
that integrates supply chain elements such as freight, warehousing, processing, and
financial services so that bulk material supply chain logistics can be managed trans-
parently, efficiently, and with customized services. The third component is a credit
service platform that integrates elements of the supply chain, such as freight, ware-
housing, processing finance, and customized services. Lastly, the platform leverages
the power of cloud services to realize intelligent resource allocation, boost resource
efficiency, and build a new ecosystem.
5.3.2 Ouyeel Cloud E-commerce Ecosphere
E-commerce Cluster
At present, Ouyeel Cloud E-commerce has formed six major e-commerce trading
platforms:
1. Ouyeel E-commerce: an e-commerce trading platform for steel products;

2. Ouyeel Resources: an e-commerce trading platform for iron ore, coal, alloys and
non-ferrous metals, etc.;
3. Ouyeel Procurement: procurement of industrial products such as spare parts and
engineering equipment;
4. Ouyeel Chemical: an e-commerce trading platform for coal chemical products;
5. Oriental Steel Recycling: an e-commerce trading platform for recycling materials
such as steel scrap, waste materials and idle and waste equipment.
6. Ouyeel International: an e-commerce platform for international trade of steel and
other bulk commodities.
It has basically formed a service platform structure of the whole variety, the whole
process, the whole region and the whole system of the steel industry chain.
Supporting Service Cluster
1. Ouyeel Logistics: logistics service platform, 1,000-warehouse plan

2. Ouye Processing: processing service platform, one-stop steel processing service
3. Ouyeel Finance: financial service platform, diversified financial supporting
service
4. Ouyeel Data: data processing service platform
5. Ouyeel Technology (Ouyeel Materials): technical service platform, knowledge
sharing and technical exchange
6. Ouyeel Information: metallurgical industry information, customized consultation
and online training, and other value-added services.
In order to solve the problem of business fragmentation of each platform under
Ouyeel Cloud E-commerce, Ouyeel has carried out the reconstruction of platform
system to realize unified architecture, data, interface, login and verification. On the
basis of platform unification, Ouyeel Federal, Ouyeel Warehouse Helper, Ouyeel
Transport Helper, Ouyeel Commerce Helper, Ouyeel Construction Helper, Ouyeel
Trust and Green Financing are representative key products, which further empower
each platform, and at the same time open up each business line to realize resource
sharing and win–win collaboration, make the platforms more collaborative and
realize the net-like connection of business points in Ouyeel Ecosphere.
5.3.3 Ouyeel Cloud E-commerce Supply Chain Finance

Services
Ouyeel Financial Services based its business model on the three-tier structure devel-
oped by Ouyeel Cloud E-commerce, providing financing services such as factoring,
pawning, and inventory financing using the credit resources of the industry chain,
promoting financial products such as mortgage financing and manufacturer banking,
bill financing, etc. In 2018, nearly 20 billion yuan was spent on financing. The
company built a billing pool to meet the invoicing quota demands of various units,
as well as expanding the external market for third-party payments, and successfully
renewed Eastern Pay’s license. Ouyeel Cloud E-commerce has effectively enhanced
its ability to raise funds by strengthening its coordination with banks and focusing
on implementing credit lines, as well as meeting the capital needs of each unit. With
the support of Baowu Group’s offline and financial resources, Ouyeel Finance, as the
only internet financial platform under Ouyeel Cloud E-commerce, has established
a financial service system around the entire steel industry chain. As a result of its
cooperation with various financial institutions, a comprehensive financial service
cluster has been formed that provides online payment, financing service, investment
and finance, asset management, and other financial products to manufacturers, bulk
commodity trading platforms, trading enterprises, and end users. In terms of supply
chain financing, Ouyeel Finance can continuously improve its products in line with
the different needs of customers in terms of financing thresholds and financing costs,
and provide multi-channel and multi-level financing products through the internet.
The current supply chain finance products mAs of today, the majority of supply chain
financing products consist of credit-based financing (such as Ouyeel IOUs, platforms
overdrafts, and accounts receivable factoring), supply chain-based financing (such
as steel inventory pledge financing, bill financing, housing and auto pawns, and so
on).it penetration and services with the help of the credit system formed.
5.3.4 Supply Chain Finance Product: Tongbao
Tongbao is a digital asset with accounts receivable claims as the underlying layer, and
it is a digital credential that can be split and is supported by block-chain technology.
Unlike traditional bills, Tongbao, in essence, is a claim credential of core enterprises
and a payment promise to suppliers. The legal relationship is reflected as a certificate
Fig. 5.3 Schematic diagram of flow of Tongbao. Source Ouyeel Cloud E-commerce
of creditor’s right of the supplier to the core enterprise’s accounts receivable, which
is regulated by the Contract Law, while bills are regulated by the Bills Law; the form
is similar to core enterprise’s e-commerce bills, but they can be split and transferred,
which is more suitable for small enterprise financing business; in liquidity, they are
similar to bank notes, which are guaranteed to be cashed in financing as a financial
institution is identified for “guaranteed discounting”; Tongbao itself is a payment
and settlement tool, and its value is reflected in its ability to initiate financing, which
will make financing more convenient as its use becomes more widespread (Fig. 5.3;
Table 5.2).
There are four values of Tongbao for suppliers: the first is that it can be flexibly
split and support partial Tongbao flow, financing, and held-to-maturity collection;
the second is repayment certainty, it electronicizes accounts receivable with fixed
due dates; the third is that it is non-recourse flow, supporting flow in the form of
non-recourse; the fourth is guaranteed financing, as the credit of core enterprises are
extended. Suppliers’ financing quota can be guaranteed on a priority basis, and the
financing cost is reduced (Table 5.3).
Tongbao is valuable to core enterprises in seven aspects: first, it makes full use
of credit granted by financial institutions; second, it visualizes the ecosphere; third,
it transmits its own credit to suppliers; fourth, Tongbao is able to be split and makes
it very easy to finance, so it is convenient to use; fifth, it helps improve the terms
of procurement transactions; sixth, it optimizes financial statements and facilitates
the reconciliation of interest-bearing liabilities and cash flow through account period
management; seventh, it improves supply chain quality, strengthens supply chain
management, and provides better financing conditions for small and medium-sized
suppliers.
Table 5.2 Difference between Tongbao and bills

Relevant parties Links Tongbao Commercial bills Bank bills
Core enterprises Account Open Tongbao In principle, it is In principle, it is
opening account necessary to open necessary to open
a settlement a settlement
account at the account at the
discount bank discount bank
Convenience of Online It takes at least T Need to provide
financing application, quick + 1 working days contracts, invoices
release of funds to submit the and other
contract, invoice information to the
and other discount bank and
information to the go to the bank
discount bank and branch for
go to the bank discounting
branch for procedures
discounting
procedures, which
is a complicated
internal business
approval process
and usually takes
up the acceptor’s
credit line and
requires the
confirmation of
the continuous use
conditions of
acceptor’s credit
Convenience of Support Not splittable There are certain
operation differential restrictions on
transfer exchanging large
(splittable) bills for small bills
Trade Provided by core Provided at the Provided by core
Background enterprises time of supplier enterprises
financing
Corporate Not reflected in Reflected in Reflected in
Credit corporate credit corporate credit corporate credit
Term With fixed term With fixed term With fixed term
Suppliers Account Open a Tongbao In principle, it is In principle, it is
opening account necessary to open necessary to open
a settlement a settlement
account at the account at the
discount bank discount bank
(continued)

Relevant parties Links Tongbao Commercial bills Bank bills
Convenience of Online It takes at least T Need to provide
financing application, fast + 1 working days contracts, invoices
release of funds to submit the and other
contract, invoice information to the
and other discount bank and
information to the go to the bank
discount bank and branch for
go to the bank discounting
branch for procedures
discounting
procedures, which
is a complicated
internal business
approval process
and usually takes
up the acceptor’s
credit line and
requires the
confirmation of
the continuous use
conditions of
acceptor’s credit
Transferability Support Equal-amount Equal-amount
differential transfer transfer
transfer
(splittable)
Source Ouyeel Cloud E-commerce
5.4 Shanghai Huaneng E-Commerce: Huaneng Credit
5.4.1 Company Profile
Founded in 2016, Shanghai Huaneng E-Commerce Co., Ltd. is a intelligent supply

chain integration service provider in the energy industry under China Huaneng
Group Co., Ltd. With the goal of “becoming an international first-class enterprise in
energy supply chain”, the Company adheres to the development strategy of “scenario
management as the cornerstone, digital intelligence technology as the engine, and
supply chain finance as the grip”, and is committed to building a shared and win–win
energy supply chain ecosphere. Through the comprehensive use of internet, IoT, arti-
ficial intelligence, big data, cloud computing, block-chain and other technologies,
Huaneng E-Commerce promotes the upgrading of industrial structure, realizes the
overall cost reduction and efficiency improvement of the industrial chain, and helps
the whole energy and related industries to develop with high quality.
5.4 Shanghai Huaneng E-Commerce: Huaneng Credit 121
Table 5.3 Comparison of advantages and disadvantages of Tongbao and related financing products
Bank bills Working Reverse Commercial Tongbao
capital loans of factoring bills
banks products of
banks
Advantages and Low cost of Low cost of Suppliers No guaranteed Only needs to
disadvantages funds, with funds, but must must open discounting, grant credit to
invoicing be recorded in accounts rely only on core
fees, can interest-bearing with corporate enterprises,
only be liabilities of designated credit, unable guaranteed
matched or enterprise, banks and to split, big discounting
exchanged increases have to financing loss as bank bills,
for payment, asset-liability obtain for suppliers. easy to open
and there are ratio of two-way Financial an account,
restrictions enterprises credit, which institutions can be split,
on exchange, increases the have other reduces
e. g., difficulty of requirements actual
long-term supplier on commercial financing
for financing bill costs (by
short-term discounting, -40% or so)
bank bills such as only
discounting
second-hand
bills
Source Ouyeel Cloud E-commerce
According to Hu Jun, CEO of Shanghai Huaneng E-Commerce Co., Ltd, the

Company is a technology innovation company established by Huaneng Energy &
Communications Holding Co., Ltd. (HNECC) to integrate relevant supply chain
service resources of China Huaneng, and it is an important carrier of the intelligent
energy supply chain strategy of China Huaneng and Huaneng Energy & Communi-
cations Holding Co., Ltd. For the energy and related industries, the Company has
erected a new generation of intelligent supply chain integration service platform to
build a series of “energy” supply chains enabling the ecological service system. It has
become one of the leading enterprises in the domestic energy industry’s intelligent
supply chain and one of the first national supply chain innovation and application
pilot enterprises. The Company is committed to achieving the development goal of
recreating a new energy level of 300 billion yuan by means of light assets and high
technology.
The Company profoundly grasps the development opportunities of power market
reform, green transformation and digital revolution, takes customers as the center,
insists on the concept of innovation-driven development, service-empowerment
and strategic synergy, and successfully builds an intelligent supply chain inte-
grated service system incorporating tendering, procurement, sales, logistics, finance
and cloud services, with business covering multiple sectors such as coal, new
energy, power supplies, power engineering, logistics and supply chain finance. The
Company’s transaction volume has reached 30 billion in 2019 and is expected to

exceed 100 billion in 2021.
With the increasing comprehensive strength, the Company has been selected as
“National Supply Chain Innovation and Application Pilot Enterprise”, “Industrial
E-commerce Pilot Demonstration Enterprise in 2019” by the Ministry of Industry
and Information Technology, and the Company’s intelligent supply chain case was
successfully included by the Ministry of Commerce in the “Collected Pilot Cases
of National Supply Chain Innovation and Application” in 2019. At the same time,
the Company won the 8th place in “China’s Top 100 Bulk Commodity E-Commerce
Enterprises” in 2019, China’s Top 10 Modern Supply Chain Enterprises for Bulk
Commodities in 2019 and many other industry awards, and its comprehensive ranking
has entered the top 10 in the industry, and the Company has grown into a benchmark
enterprise for supply chain innovation of state-owned enterprises, effectively empow-
ering the energy industry to transform and upgrade and promoting cost reduction and
efficiency improvement of the whole industrial chain through intelligent supply chain
innovation.
5.4.2 Huaneng Intelligent Supply Chain Ecological Service

System
Huaneng Intelligent Supply Chain is an ecological intelligent energy supply chain

integration service platform built by Shanghai Huaneng E-commerce Co., Ltd. The
platform adheres to the customer-centered development concept, starts from the char-
acteristics of the energy supply chain industry and customers’ pain points, brings
into play the brand and resource advantages of state-owned enterprises, and provides
one-stop supply chain integration services including Huaneng Tendering, Huaneng
Procurement, Huaneng Sales, Huaneng Logistics, Huaneng Finance and Huaneng
Cloud Services for customers upstream and downstream of the supply chain by using
the internet, IoT, big data, block-chain, artificial intelligence and other new tech-
nical means. At present, the Company has formed an integrated supply chain service
system that includes six functions, namely tendering, procurement, sales, transporta-
tion, financing, and cloud service, which empowers the supply chain ecological enter-
prises, improves the overall competitiveness of the supply chain and shares the new
values of supply chain synergy (Fig. 5.4).
The role of Huaneng Tendering to empower tendering, and it is an open, trans-
parent, safe and efficient professional electronic tendering/bidding trading platform;
the role of Huaneng Procurement is to empower procurement, and it is an online
collective procurement, customized procurement and end-to-end supply chain plat-
form; the role of Huaneng Sales is to empower sales, and it is an e-commerce plat-
form for bulk commodities such as coal, power supplies and spare parts; the role
of Huaneng Transportation is to empower logistics, and it is an “LES + TMS +
transportation capacity transaction management” intelligent logistics platform; the
Fig. 5.4 Huaneng intelligent supply chain service system. Source Shanghai Huaneng E-Commerce
Co., Ltd
role of Huaneng Finance is to empower finance, which is an AI + big data + district

capacity trading platform; the role of Huaneng Finance is to empower finance, and it
is an AI + big data + block-chain technology financial ecological service platform;
the role of Huaneng Cloud Services is to empower the cloud platform, and it is a
supply chain SAAS cloud platform with visualization + fine management.
5.4.3 Background and Significance of “Huaneng Credit”

Business
The “Guidance on Actively Promoting Innovation and Application of Supply Chain

(GBF (2017) No. 84)” Promulgated by General Office of the State Council points
out that “promoting the innovation and development of supply chain is beneficial
to reduce the operating and transaction costs of enterprises, promote the accu-
rate matching of supply and demand and industrial transformation and upgrading.
The regulated development of supply chain finance is conducive to broadening the
financing channels of SMEs, ensuring that the flow of funds to the real economy.”
Under the background of national supply-side structural reform and electric power
system reform, the electric power industry ushers in a new stage of supply chain
innovation and application, and new comprehensive energy services will become a
new blue ocean for electric power enterprises to compete.
The business of “Huaneng Credit” is of great significance to the Group to improve
the management level and operation quality of supply chain capital flow, realizes the
“integration of industry and finance”, and enhances the overall competitiveness of
supply chain, and the business marks the development of the supply chain of the
Group to the direction of intelligent supply chain. With “Huaneng Credit” as a grip,
Shanghai Huaneng E-commerce Co., Ltd. helps the Group optimize the value chain
of energy industry sustainably and helps the upstream and downstream enterprises
in the industry achieve sustainable cost reduction and efficiency improvement.
5.4.4 Introduction of “Huaneng Credit” Product
Huaneng Credit Product

“Huaneng Credit” is an innovative new product of inclusive supply chain finance
that can be split, transferred and financed based on the full use of credit and financial
support given to core supply chain enterprises by banks, factoring companies and
other financial and pseudo-financial institutions.
Based on the supply chain supporting services provided by the HNECC platform,
“Huaneng Credit” takes the combination of industry and finance, cost reduction and
efficiency improvement as the goal and the creation of a cross-region, cross-industry,
cross-platform and cross-funding source comprehensive ecosphere as its vision, and
further upgrades the traditional supply chain finance model by using the innovative
“electronic payment commitment letter” to enhance the overall operational efficiency
of the supply chain.
Core Logic and Basis of “Huaneng Credit”

The core logic of “Huaneng Credit” product design is to solve the problem of difficult
confirmation of rights of core enterprises with standardized confirmation certificates,
and provide a new choice for settlement of current accounts between upstream and
downstream enterprises in the supply chain. According to Article 79 of the Contract
Law of the People’s Republic of China, creditors can transfer all or part of their
contractual rights to a third party. The design of “Huaneng Credit” strictly abides
by national laws and regulations, and ensures the reliability of products by means of
blockchain core accounting technology (Fig. 5.5).
Fig. 5.5 “Logic of Huaneng Credit”. Source Shanghai Huaneng E-Commerce Co., Ltd
Business Process of “Huaneng Credit”

Revolving around the core enterprises issues standardized right confirmation certifi-
cates, the business process of “Huaneng Credit” realizes the high-quality credit circu-
lation of invoicing enterprises through the network platform and provides trade finan-
cial services such as rapid financing, multi-level circulation and due repayment for
small and medium-sized suppliers in the supply chain (Fig. 5.6).
In principle, the opening of “Huaneng Credit” can be done at any time after
the contract is signed, but in order to balance the risk control and financing effect,
core enterprises usually open “Huaneng Credit” on the platform after the materials
arrive and are accepted. The setting of the opening period has greatly improved
the efficiency of financing and ensured the timeliness of financing for upstream
enterprises in the supply chain (Fig. 5.7).
Capital Settlement of “Huaneng Credit”

When the core enterprise cashes in “Huaneng Credit” at maturity, the payment is paid
directly to the supplier’s account, and then automatically distributed by “Huaneng
Credit” clearing platform to “Huaneng Credit” holders.
Fig. 5.6 Logic of Huaneng Credit. Source Shanghai Huaneng E-Commerce Co., Ltd.
Fig. 5.7 Opening period of “Huaneng Credit”

Fig. 5.8 Comparison between Huaneng Credit and commercial bills
Comparison Between “Huaneng Credit” and Traditional Payment Settlement

Methods
“Huaneng Credit” combines many advantages of traditional trade financing methods,
in addition to the features of absolutely free commercial bills, high reliable bank
bills, and splittable cash, it also highlights easy traceability. “Huaneng Credit” has
similar functions to commercial bills, but its operation mode and characteristics are
quite different. It is more flexible and convenient than commercial bills, and has the
characteristics of low cost, low risk and high liquidity, so it can be used instead of
commercial bills (Fig. 5.8).
5.4.5 Application Value of “Huaneng Credit” Platform
Improved capital liquidity: based on the advantageous features of easy opening, easy
circulation, easy splitting and easy financing, Huaneng Credit enriches the means
of payment and settlement for core enterprises, improves the efficiency of corporate
capital circulation, and eliminates the pain points in the traditional payment and
settlement process.
Reduced supply chain capital cost: relying on the credit of core enterprises to
provide inclusive financing channels for SMEs in the supply chain, Huaneng Credit
optimizes the overall capital cost of the supply chain, promotes the healthy develop-
ment of the chain, enhances the loyalty to the supply chain, and effectively revitalize
credit assets.
Reduced interest-bearing liabilities and finance costs: The subject of energy credit
financing is Huaneng Credit holders (suppliers) rather than core enterprises that open
Huaneng Credit, and the finance costs are charged to suppliers, so core enterprises
can use Huaneng Credit as a tool to flexibly adjust the account period, effectively
reduce the scale of interest-bearing liabilities and thus reduce finance costs.
Chapter 6
Introduction of Supply Chain Finance
Solutions
In the previous chapter, we described how different enterprises have used the supply
chain finance solution of multi-level splittable and transferable digital evidence of
indebtedness instruments to empower SMEs in the supply chain. So how is the
supply chain finance solution, as an innovative solution that combines technology,
finance, supply chain organization form and multi-disciplinary coordination, built
or introduced from scratch? In this chapter, we develop a model for the adoption of
supply chain finance by enterprises through the diffusion of innovation theory, and
present a number of cases in which large central enterprise groups have engaged in
and built supply chain finance business.
6.1 Diffusion of Innovations Theory
6.1.1 Introduction to Diffusion of Innovations Theory
The theory of diffusion of innovation attempts to explain when, how, and why new
technologies and ideas spread. The theory was popularized by Everett Rogers, a
professor of communication, in his book Diffusion of Innovations. Rogers char-
acterizes diffusion as a process by which innovations are exchanged over time
among members of a social system. Differing disciplines have contributed to the
development of diffusion of innovation theory.
Rogers identified four factors that influence the diffusion of new ideas: innova-
tion, communication channels, time, and the social system. Human capital plays an
essential role in this process. Innovations must be widely adopted to be sustainable.
There is a critical mass of adoption within the rate of adoption.
Adopters can be classified as innovators, early adopters, early majorities, late
majorities, and laggards. Diffusion takes many forms, influenced by the type
of adopter and the innovation process. A criterion for adopter classification is
innovativeness, which is the degree to which a person is responsive to new ideas.
https://doi.org/10.1007/978-981-19-3513-8_6
130 6 Introduction of Supply Chain Finance Solutions
6.1.2 History of Diffusion of Innovations Theory
Diffusion of innovations was first studied in the late nineteenth century by French
sociologist Gabriel Tarde and German and Austrian anthropologists and geogra-
phers Friedrich Ratzel and Leo Frobenius respectively from Germany and Austria.
The study of this phenomenon began in the Midwest during the 1920s and 1930s as
part of a sub-field of rural sociology. As agricultural technology advanced rapidly,
researchers began studying how independent farmers adopted hybrid seeds, equip-
ment, and technology. The research conducted by Ryan and Gross on the adoption
of hybrid corn seeds in Iowa in 1943 solidified earlier studies on diffusion and
made it a paradigm from which future research was derived. Originally developed
in rural sociology, diffusion innovations have since been applied to a wide range of
settings. These settings include medical sociology, communication, marketing, devel-
opment research, health promotion, organizational research, knowledge manage-
ment, conservation biology, and complexity research, with implications for pharma-
ceuticals, medical technology, and medical communications. The epidemiological
or internal forms of influence in organizational research were developed by Earl
Pemberton, e.g., postage stamps and standardized school codes of ethics.
The seminal work Diffusion of Innovations was published in 1962 by Everett
Rogers, a professor of rural sociology. Rogers synthesized data from over 508 disci-
plines that had originally influenced his theories: anthropology, early sociology, rural
sociology, education, industrial sociology, and medical sociology. In his synthesis
theory, Rogers developed a theory regarding individual and organizational adop-
tion of innovation. In the field of diffusion of innovations, Rogers’ later works
have received the most citations. Recently, his approach has received considerable
attention in diffusion research, even as the field has expanded into and been influ-
enced by other methodological disciplines, including social network analysis and
communication.
6.1.3 Essential Elements of Diffusion of Innovations
In Table 6.1, we present the essential elements of diffusion of innovations.
6.1.4 Process of Diffusion of Innovations
Diffusion is a result of a five-step decision-making process. As a result of a series of

communication channels between members of a similar social system, this process
occurs over time. The term “adoption” was first used by Ryan and Gross in 1943.
Rogers’ five stages (steps): awareness, interest, evaluation, experimentation, and
adoption are part of this theory. Rogers changed the terminology in his later book,
6.1 Diffusion of Innovations Theory 131
Table 6.1 Essential elements of diffusion of innovations research

Elements Definitions
Innovation Innovation is a broad category relative to the current unit of
knowledge analysis. Any idea, practice, or object considered new by
an individual or other unit can be considered an innovation available
for study
Adopters The adopter is the smallest unit of analysis. In most studies, adopters
are individuals, but they can also be organizations (enterprises,
schools, hospitals, etc.), clusters in social networks, or countries
Communication channels Diffusion, as the name implies, occurs between people or
organizations. Communication channels allow information to pass
from one unit to another. Communication patterns or capabilities
must be established between parties as the occurrence of minimum
diffusion
Time The passage of time is a necessary condition for the adoption of
innovation, which is rarely adopted immediately. Indeed, in Ryan
and Gross’s study on the diffusion of technological innovations in
hybrid corn in 1943, the adoption of new technologies occurred over
a period of more than 10 years, with most farmers allocating only a
small portion of their land to the new corn in the first few years after
adoption
Social systems Social systems are a combination of external influences (mass media,
surfactants, organizational or governmental directives) and internal
influences (strong or weak social ties, distance from opinion leaders).
There are many players in a social system, and their combination
represents the full range of influences on a potential adopter
Source Wikipedia
Diffusion of Innovations, by referring to the stages as: knowledge, persuasion, deci-

sion, implementation, and confirmation. The categories, however, remain the same
(Table 6.2).
6.1.5 Decision for Innovation Adoption
There are two factors that determine the type of decision: the first is whether the
decision is made freely and voluntarily implemented, and the second is who makes
the decision. These factors indicate that there are three types of innovation decisions
(Table 6.3).
Table 6.2 Five steps of diffusion of innovations

Stages Definitions
Knowledge/Awareness The individual is exposed to innovation for the first time, but lacks
information about it. At this stage, the individual is not yet motivated
to discover more information about innovation
Persuasion The individual is interested in innovation and is actively seeking
information/details about it
Decision The individual accepts the concept of change, weighs the pros and
cons of using innovation, and decides whether to accept or reject it.
Due to the individualistic nature of this stage, Rogers notes that it is
the most difficult stage to obtain empirical evidence
Implementation The individuals use innovations to varying degrees depending on the
situation. At this stage, the individual also decides on the usefulness
of the innovation and may seek further information about the
innovation
Confirmation/Continuity The individual eventually decides to continue using the innovation.
This stage is both personal (which may lead to cognitive dissonance)
and interpersonal, confirming that the group has made the right
decision
Source Wikipedia
Table 6.3 Types of innovation decisions

Types Definitions
Optional innovation decisions Made by someone who is different in some way
Collective innovation decisions Made by all participants together
Authoritative innovation decisions Made by an individual with influence or power for the
whole social system
Source Yagnesh sondarva
6.1.6 Speed of Innovation Adoption
Adoption speed is the relative rate at which participants adopt an innovation. It is

usually measured as the time it takes for a certain percentage of members of a social
system to adopt an innovation. An individual’s adopter category determines the rate
at which an innovation is adopted. An innovation that is adopted for the first time
generally requires a shorter adoption cycle (adoption process) than that which is
adopted later. Critical mass is reached at some point in the adoption curve. In other
words, the number of individual adopters ensures the sustainability of the innovation.
Adoption Strategies
This stage can be reached using a number of strategies, such as when an innovation is
adopted by a highly respected individual and creates a desire for a specific innovation
6.1 Diffusion of Innovations Theory 133
instinct. One strategy is injecting a new technology into a group of people who are
willing to use it, as well as providing positive reactions and benefits for early adopters.
Diffusion and Adoption

The adoption of a product involves a series of stages from when it’s first introduced
to when it’s finally adopted. Innovations spread through group diffusion.
6.1.7 Types of Adopters
In total, there are five types of adopters: innovators, early adopters, early majority, late
majority, and laggards. Change agents can also be from outside a community, as well
as opinion leaders. Through messengers, opinion leaders, and then the communities
themselves, change agents bring innovation into new communities (Table 6.4).
The percentage of various adopters of innovations is shown in the following
Fig. 6.1.
Table 6.4 Five different types of innovation adopters

Types of adopters Definitions
Innovators Innovators are willing to take risks, have the highest social status and
financial mobility. They are social, maintain the closest connection to
scientific resources, and interact most closely with other innovators. Their
risk tolerance allows them to adopt technologies that may eventually fail.
Financial resources help absorb these failures
Early adopters These individuals have the highest degree of opinion leadership in the
adopter category. Early adopters have higher social status, financial
mobility, higher levels of education, and are more forward-looking socially
than late adopters. They are more careful in their adoption choices than
innovators. They use wise choices to help them maintain a central
communication position
Early majority They will adopt an innovation after a much longer period of varying
degrees of time than innovators and early adopters. The early majority have
above average social status and are associated with early adopters, but
rarely hold an opinion leader position in a system
Late majority They adopt innovations after average participants. These individuals see
innovation with a high degree of skepticism and after the majority of
society has accepted it. Late majority are usually skeptical of innovation,
have below average social status, little financial mobility, are in contact with
others in late majority and early majority, and have few opinion leaders
Laggards They are the last to adopt innovations. Unlike some of the previous
categories, this group has little or no opinion leadership. These individuals
usually have an aversion to change agents. The laggards usually tend to
focus on “tradition,” they have the lowest social status, the lowest financial
mobility, they are oldest of the adopters, and those who are in contact only
with family and close friends
Source David T. Bourgeois
Fig. 6.1 Adoption curve of innovations
6.1.8 Outcomes of Adopting Innovations
Positive and negative outcomes can occur when an individual or organization adopts a
particular innovation. Due to the biased positive attitudes associated with innovations,
Rogers notes that further research is necessary in this area. As Rogers describes them,
consequences can be classified into four categories: desirable and undesirable, direct
and indirect, and anticipated and not anticipated. Wejnert, on the other hand, outlines
two categories: public and private, costs and benefits.
Public and Private

Public and private outcomes are both associated with innovation. Those who are
affected by innovation are the public, whereas those who are affected by innovation
are the private. Collective actors, such as governments and organizations, are usually
responsible for the effects of public innovation. Smaller groups or individuals usually
suffer private consequences.
Benefits and Costs

Innovation has both positive and negative effects. Costs can be direct, indirect, mone-
tary, or non-monetary. These costs are typically associated with the financial situation
of the actor and his or her economic situation. As an example, an innovation’s seeds
need to be treated with a new pesticide in order to use it. Indirect costs are more
difficult to determine. A social cost may also be indirect, like that caused by social
conflict from innovation. The diffusion process determines whether a new product
succeeds or fails, and therefore it is important to understand the diffusion process so
that new products or services can be effectively communicated.
6.2 Introduction of Supply Chain Finance Solutions
In order to optimize the overall supply chain performance, more and more companies
are introducing supply chain finance operations. Supply chain finance offers a way
not only to help SMEs out of short-term liquidity difficulties, but also to reduce the
6.2 Introduction of Supply Chain Finance Solutions 135
long-term financial burden of the supply chain, for example, the total amount of
liquidity necessary in the supply chain. Coordinated funds require less liquidity to
move through the supply chain than uncoordinated ones, leading to higher financial
savings, especially if buyers and suppliers have different credit ratings.
6.2.1 Intra-Organizational Innovation
The innovation process within an organization can be divided into five stages: agenda
setting, Matching problems with innovative solutions, problem matching, redefini-
tion/structural reorganization, problem clarification, and routinization. Among them,
the first 2 stages are the initiative process and the last 3 stages are the implementation
process of innovation. The later stages can be carried out smoothly only after the
problems arising in the previous stages are properly solved (Fig. 6.2).
Agenda
When an organization encounters a specific problem in the course of its operation,
and therefore a need for innovation arises, specifically a need for innovation in
supply chain finance solutions due to the business, it is often necessary to make
an agenda for the innovation process. In fact, all systems are engaged in agenda
scheduling activities at all times. Only then do system members know exactly what
to do first and what to do next. Agenda setting is actually the process of identifying
the problems to be solved in the organization, the needs arising from these problems
in the organization, and prioritizing and solving these problems and needs in a certain
order. So, there are mainly two things to be done in the agenda scheduling stage. The
first is to identify the problems and needs of the organization and prioritize them;
Fig. 6.2 Innovation process in the organization. Source Diffusion of Innovations (4th Edition) by
Rogers
the second is to combine the internal and external environment of the organization,
and develop our potential innovative solutions to solve organizational problems and
meet organizational needs.
Matching of Problems and Innovation Solutions

The matching phase of problems and innovation solutions means that the organi-
zation seeks the corresponding innovation solution in response to the prioritization
of the issue identified in the agenda, and the matching has a detailed planning and
design. Specifically it is about what model of supply chain finance is chosen. The
second step of the innovation process within the organization is to conceptually
match the problems encountered with the corresponding innovation solutions, so
as to determine the extent to which the innovation solution can solve the problems
in practice. This is where the members of the organization test the reality of an
innovation solution in order to determine its feasibility in solving the organization’s
problems. In this symbolic planning phase, the organization’s members think about
what problems they might encounter once the innovation is implemented. Of course,
decision makers in the organization may come to a conclusion and the problem is not
properly matched with the innovation solution, and in this case, the decision makers
may reject the existing innovation solution. Therefore, the whole innovation process
is over before the implementation phase begins.
Redefinition/Recombination of Innovation
In this stage, innovation introduced from outside the organization gradually lose their
original alienation characteristics, e.g., supply chain finance has gradually evolved
into a solution suitable for its own supply chain development. In the process of
implementation, innovations are constantly reinvented to better fit the needs and
structure of the organization; at the same time, the organizational structure is changed
and adjusted accordingly to the needs of innovation.
Clarification of Problems
This phase occurs when the innovation is put into increasingly widespread use within
the organization so that the members of the organization can clearly understand the
implications of innovation. Implementing the innovation too quickly in this sub-
stage can lead to disastrous consequences. Innovations can invite misunderstand-
ings or bring unintended side effects. If detected in time, remedial measures can be
implemented. There should be a solid arrangement within the organization to clarify
the problem phase of the innovation process. Innovation is becoming embedded in
and part of the organization. During the problem statement phase of the innovation
process, members of the organization try to find answers to many questions. The most
typical questions are usually: How does the innovation operate in practice? What is
the role of the innovation? What individuals in the organization will be affected by
the innovation? Will the innovation affect me personally? Members of the organiza-
tion are constantly talking about the innovation they have just implemented and they
will gradually develop a more consistent understanding of the innovation. Thus, the
significance of the innovation is gradually revealed through a social process in which

the members of the organization influence each other.
Routinization means innovations is integrated into daily activites, thus there is
no special indentity for innovation. At this point, the innovation process within the
organization ends and the members of the organization do not consider the innovation
to be a completely new concept because innovation has been fully transformed into a
part of the regular functioning of the organization. At this stage, supply chain finance
has become an integral part of the regular business of the enterprise and the supply
chain.
6.2.2 Stages of Introducing Supply Chain Innovation
Advocating and Deciding to Adopt Supply Chain Finance

In the stage of advocating for companies to undertake supply chain finance, which
consists of agenda setting and matching, companies present different attitudes: those
willing to implement usually then have a lower risk aversion and a stronger leader-
ship committed to innovation; those that refuse to implement or are slow to do so
usually have traditional organizational culture, choose to avoid the uncertainty about
innovation, or are a lack of commitment or support from senior management.
The initiation of supply chain finance business shows a similar diffusion pattern to
other organizational innovations. Adopting companies need to have certain generic
strategic priorities so that they are attracted to supply chain finance innovations. For
example, enterprises need to focus on both working capital improvement and supply
chain stability. Similar to previous organizational innovations, the adoption deci-
sion process includes recommendations from top management and cross-functional
teams. In addition, we have learned that competitors’ adoption of supply chain finance
can lead their own enterprises to emulate, which can be used as an opportunity to lead
enterprises to start adopting supply chain finance. While this process varies slightly
within each organization, we have found a strong overlap with existing knowledge in
terms of key companies’ adoption decisions. However, the supply chain finance solu-
tion does not interact with the supply chain foundation before the implementation
phase.
However, as an upstream innovation, supply chain finance has some inherently
unique characteristics. On the one hand, the buyer as an innovator plays a larger
role in identifying supply chain finance as a possible solution than the seller of
innovative products. On the other hand, in the case of downstream innovation, the
demand for supply chain innovation is often more explicitly sent out by customers or
competitors, with few suppliers explicitly requesting supply chain finance solutions
because they are supplied by other companies that would likewise offer them supply
chain financial services. Thus, the origin of this innovation lies with the buyer itself,
and supply chain finance can be considered a push rather than a pull innovation. In
addition, supply chain finance business requires enterprises to consider improving
working capital efficiency through restructuring. As a result, supply chain finance
does not usually achieve immediate success in terms of profitability in one lifecycle
as other downstream innovations, but is initiated in the company with a long-term
focus on repeated efficiency improvements.
Implementation of Supply Chain Finance Innovations

The effectiveness of innovation adoption depends on the fit between the organization
and the innovation itself, which fit can be achieved in the three following ways:
reorganizing the organization, redesigning the innovation, or both.
Redefining supply chain finance is a process in which enterprises not only adapt
supply chain finance innovations to their specific environment, but also initiate a
process in which they need to reconsider the environmental factors that need to be
adapted to supply chain finance innovations, the value of which changes over time.
The value added for suppliers becomes increasingly important in the adoption
process. Why should a supplier agree to use supply chain finance if the supply chain
finance solution does not meet the supplier’s needs? One aspect of the alignment
is the need to focus specifically on providing visibility into cash flows and invoice
releases so that suppliers are given maximum flexibility as they can better plan when
to receive cash flows. Therefore, before actually redefining supply chain finance,
enterprises need to define the criteria that supply chain finance innovations need to
meet.
According to what an enterprise needs to change the environment and match it
to the decision of introducing supply chain finance innovation, there are three types
of redefining supply chain finance: first, the mechanism for distributing benefits;
second, the degree of transaction automation; and third, the extent to which suppliers
use supply chain finance, as summarized in Table 6.5.
Innovation in supply chain finance requires cross-functional collaboration
between finance, logistics and procurement, but this is a completely new approach
for many companies. Some companies whose finance departments have never had
any business contact with suppliers need to first get to know their internal supplier
managers. Successful adoption of SCF requires active collaboration between finance,
logistics and procurement managers, as the former are dedicated finance specialists,
while the latter often manage the interface with suppliers. The first step is to bring
together the managers responsible for each function, starting with unconventional
project meetings until the right collaboration model is established.
Table 6.5 Redefining the types of supply chain finance innovations

Types Dimensions
Benefit sharing mechanism Direct (e.g. commissions to Indirect (e.g. extension of
banks) payment terms)
Degree of transaction Low automation (use case High automation (ERP
automation based) integration)
Extent to which suppliers use Very little (strategic) Use as much as possible
supply chain finance
In addition, adjustments had to be made to the job function design. Adopting

supply chain finance requires more tasks than the traditional tasks of upstream logis-
tics and procurement managers, as there is a need to promote supply chain finance
innovations in upstream markets, yet these marketing skills are very different from
the traditional skills in these functions. Typically, marketing and sales personnel are
more experienced and better at promoting innovations to customers than logistics and
procurement managers when it comes to downstream innovations, whereas logistics
and procurement managers must promote upstream innovations to suppliers. This
increases the complexity of their work and must first be embraced and learned by
procurement and logistics managers. As a result, the need for capacity building in
the adoption process further contributes to a higher and broader demand for strategic
thinking and strategic skills in the upstream supply chain function.
On top of that, the restructuring includes adjustments to the performance measure-
ment system and incentives for individual managers, and without changes to the
incentive structure, it might be hard to carry out supply chain finance operations.
Consistent with prior research, this is likely to be generalized, and there is a particular
need to link logistics and financial incentives to per capita work levels.
The analysis above further shows how restructuring and redefining are interre-
lated. On one hand, the three types of redefinition decisions mentioned above can
only be effectively made if the buyer is successfully restructured. On the other hand,
organizations need specifications from the redefinition process to effectively reorga-
nize these categories. Thus, these two processes are intertwined and influence each
other. They can be summarized in the following four points:
(1) Reorganization within the organization and redefinition of supply chain finan-
cial innovation based on supply-side demand are interrelated and mutually rein-
forcing processes, in the sense that neither effort can be successful without the
advancement of either one.
(2) The process of recombination and redefinition is limited by two factors: first,
the alignment of logistics, procurement, and finance; and second, the extent of
supplier involvement required by higher levels of logistics, procurement, and
finance alignment and supplier involvement.
(3) Clarification and communication are interlinked and mutually reinforcing
processes, in the sense that neither effort can be successful without the
advancement of either one.
(4) (a) Supply chain finance leverage (all the benefits that a purchasing company
can offer to its suppliers through supply chain finance) has a positive impact
on the communication of supply chain finance, which increases the efficiency
of the communication process among suppliers. (b) Relationship strength has a
positive impact on the communication of supply chain finance, which increases
the efficiency of the communication process among suppliers.
6.2.3 Adoption Model of Supply Chain Finance Innovation
Based on Rogers’ intra-organizational innovation framework, a framework for the

adoption of supply chain finance innovation process can be generated by combining
the framework with the actual supply chain finance innovation. Unlike other organi-
zational innovations, the process of redefining supply chain finance requires consider-
ation of the needs of upstream supply chain partners. This process is closely related to
the reorganization of the organization. This interrelationship adds to the complexity
of adopting supply chain innovation and is not an ordinary organizational innova-
tion, and the third stage of redefinition and recombination needs to be conducted
separately.
Enterprises will be more efficient at this stage if they achieve an integration of
logistics, procurement and finance. While collaboration between these functions can
be seen in projects to reduce operational costs, strategic alignment towards common
goals is new in many companies, as it often requires an enhanced mutual under-
standing between logistics, procurement and finance managers, with a broader range
of skills on all sides.
This integration of logistics, procurement and finance is also typical for supply
chain finance, and while previous processes may have required internal integration,
such integration is usually between two operational functions, such as manufacturing,
procurement or logistics and marketing, rather than between corporate finance and
upstream logistics or procurement. The innovation of supply chain finance itself
is a completely new concept for those for the buyer and the seller. This poses a
management challenge internally, and therefore externally, because of the need to
go to select suppliers to participate in supply chain finance innovation in the early
stages when one’s own organization has not fully clarified and adopted supply chain
finance.
Next, enterprises need to clarify internally and communicate upstream the supply
chain innovations that have been configured. These two processes are closely inter-
twined and mutually predicated. In addition, upstream supply chain capabilities
compensate for their lack of experience in using marketing opportunities and supply
chain finance innovations to bring the benefits to external entities, which differenti-
ates effective supply chain finance adopters from less efficient adopters. In the design
chain management of effective credit product design with suppliers, the benefits are
obvious to suppliers given the history of relationships in this area of cooperation.
Again, this intertwining adds to the complexity of the adoption process. While finance
managers in particular often lack attention to supplier needs, it is the responsibility
of the logistics and/or procurement departments to ensure that sufficient suppliers
are recruited.
In addition, supply chain finance communication can only be accomplished if the
redesign is successful and the enterprise has the leverage and relationship strength
of supply chain finance. In contrast to downstream communication, the enterprise
6.3 Cases of Introdution of Supply Chain Finance 141
Implementation
Initiative stage stage
Problem
Agenda matching
Structural reorganization Clarification of problem
and finance combined

1 3
Logistics, procurement,
Supplier participation
Routinization
2a
Re-definition
(for upstream of supply chain) Communication
4a 4b
Supply chain Relationship
finance leverage strengthening
Fig. 6.3 Process of adoption of supply chain finance innovation
must consider the trade-off between communication execution and long-term rela-
tionships. The adoption process of supply chain finance innovation in the enterprise
and supply chain is shown in Fig. 6.3.
6.3 Cases of Introdution of Supply Chain Finance
In the preceding section, the diffusion of innovation theory has been used to develop
the process in which supply chain finance solutions are adopted and implemented
in organizations. Next, we use a few case studies to further describe the process in
which conglomerates, especially central enterprises, gradually build up their supply
chain finance business.
6.3.1 Sinopec EPEC Supply Chain Finance
State-owned enterprises’ supply chains are closely related to the process of innovation
in material procurement systems. Core companies, mainly large state-owned compa-
nies, are gaining traction in supply chain financing. Four major business models can
be identified: electronic commercial bills discounting, commercial factoring, online
supply chain financing, and interconnected modes of supply chain financing. Creating
supply chain finance for core enterprises reduces procurement costs, increases
product sales, and enhances market competitiveness of upstream and downstream

SMEs, while enriching the business lines of the enterprise and creating new economic
growth points.
Introduction of the Group

The Corporation was established as China Petroleum and Chemical Corporation in
July 1983. China Petrochemical Group Corporation arose upon reorganizing the
former China Petroleum and Chemical Corporation as part of the CPC Central
Committee’s strategic reorganization of the petroleum and petrochemical industry.
In August 2018, China Petrochemical Corporation was restructured. As a mega
petroleum and petrochemical enterprise group, the Corporation has a registered
capital of 274.9 billion yuan. The Chairman is the legal representative, and it is
headquartered in Beijing. The Corporation is a financier who is responsible for the
state-owned assets of its wholly-owned enterprises, holding companies and share-
holding companies. Among the corporation’s responsibilities are the use of the assets,
selecting managers, operating, managing, and supervising the state-owned assets in
compliance with the law, and preserving and increasing their value. In 2018, it is the
second-largest producer of oil and gas, the second-largest oil refining company in
the world, and the third-largest chemical company in the world. It owns the second
most gas stations in the world, and is ranked No. 3 among the Top 500 companies.
Introduction of the Platform

China’s Sinopec launched EPEC, an e-commerce platform integrating procurement
and sales functions, on April 1, 2015 and put it into commercial operation on April 18,
2016, starting with a mode of “internet+ .”. End of October 2019, the platform sold
1.86 million goods, an increase of 4% over last year; 196,000 users registered, and
70,000 companies registered, a 20% increase over 2018; 286.2 billion yuan in trans-
actions, an increase of 1.2 times over last year; the four-month transaction amount
of 413.2 billion yuan exceeded last year. In 2018, the platform’s external transaction
amount reached 135.6 billion yuan, an increase of 5.7 times from last year, repre-
senting 47.4% of the platform’s total transaction amount, up 31.9 points from a year
earlier; between January and October 2019, the external transaction amount totaled
264.6 billion yuan, representing 64% of the platform’s total transaction amount. The
online payment scale of the platform reached 107.8 billion yuan, an increase of 1.7
times from January to October 2019; the figure was 144.3 billion yuan, an increase
of 69% from January to October 2018.
Supply Chain Management Experience
Co-creation of Value Experience

The industrial supply chain is where EPEC creates value together. The first thing is
vertical penetration. EPEC focuses on the industrial chain, searches for suppliers,
finds customers for suppliers, and realizes the penetration of the industrial chain.
Second is the horizontal supply chain connection. Epec focuses on the supply chain,
integrates common needs, and builds a bridge between suppliers that’s easy, econom-
ical, and convenient. Third, it finances the supply chain. EPEC helps related parties
get financing, focuses on corporate financing needs, and applies big data. It also pene-
trates the service chain in multiple directions. EPEC focuses on the service chain,
delivers value-added services, and helps both state-owned and private companies.
Fifth, it interconnects the manufacturing line. EPEC focuses on the manufacturing
chain, crosses the industrial boundary, and connects manufacturing chains between
companies in the equipment sector. There’s also a trade chain of collaboration and
interoperability. EPEC focuses on the trade chain, offers integrated solutions online
and offline, covers the whole process, and is all about interconnection and trade
integration.
Experience on Open Cooperation

In the first place, EpecStandard will create a standard-led, crafted system that includes
corporate credit certification, quality evaluation, dynamic performance evaluation,
and market performance measurements, promoting the international use of Epec-
Standards and results, and assisting international trade integration. The value-added
services are also shared. With the launch of the procurement zone integrated connec-
tivity, the knowledge innovation capacity evaluation system, commercial factoring
services, electronic debt voucher services, business travel services, and one-stop
insurance services—Simple Insurance—EPEC offers procurement, sales, finance,
and integrated services based on user needs. The third step is to import high-quality
goods from around the world. EPEC offers a wide range of services and displays
industrial products from around the world including promotional displays, support
services, and trade integration. Platform services help enterprises in 68 countries
along the “Belt and Road” trade industrial products worth 8.69 billion U.S. dollars
with 104 countries and regions worldwide.
Experience on Co-Building of Supply Chain

Together with its partners, EPEC is committed to building a transparent supply chain.
In addition to standardization in procurement and purchasing, digitization in manu-
facturing, and transparency in logistics, it also promotes interconnectedness in infor-
mation. Transparent Supply Chain Campaign plans to put 10 related enterprises
online by the end of 2019.
EPEC Supply Chain Finance

As a specialized industrial e-commerce platform, EPEC mainly provides services
such as industrial procurement and online trading. At the same time, it has launched
a supply chain finance service channel for upstream and downstream companies to
meet their capital financing requirements. The platform offers supply chain financial
products such as commercial factoring and order financing, and clients can apply
directly online and receive funding immediately upon passing an audit.
Commercial factoring business (1) Factoring: the purchaser and the supplier
enter into a contract, and then the seller transfers the accounts receivable arising
from the sale to a factoring company. (2) EPEC Commercial Factoring: When
a Sinopec enterprise purchases goods, the supplier delivers them and they are
accepted, and then the supplier who needs funding applies to EPEC Commercial
Factoring Company, which provides recourse financing service, while the ratio of
the financing is generally between 70 and 80% of the accounts receivable. (3) EPEC
has a license for a factoring operation focused on physical operations of real enter-
prises. With a factoring volume of 12.9 billion yuan, it offers a variety of commercial
factoring services to 410 enterprises, and ES evaluation data shows it operates online.
(3) Commercial factoring advantages. Reducing liquidity risk by early realization
of accounts receivable; improving financial statements and optimizing enterprise
asset structure; increasing capital turnover and expanding sales scale; promoting
economies of scale and reducing production costs. (4) Service advantages. Fast loan
release available on the same day, attractive financing interest rate, no occupation of
credit line of financial institutions, flexible financing term, and full-process online
operation.
Order financing business (1) Introduction to business: EPEC platform cooperates
with banks to offer financing services to suppliers. In return, the platform provides
information to the bank, which the bank can use to understand Sinopec’s transactions
with the supplier, reduce the amount of credit application data submitted, guarantee,
and collateral, improve the bank’s credit quota and examination efficiency, while
also providing convenience to the supplier. (2) Application conditions: Applicants
for financing may apply for financing by registering and passing identity verification
on the EPEC platform. (3) Huaxia Bank, Bank of Communications, China Guangfa
Bank, Minsheng Bank, Industrial and Commercial Bank of China, and Bank of China
are cooperating banks.
Electronic debt voucher service: The service provides splitting, transferring and
financing of accounts receivable claims. Multi-level circulation, combined with the
credit of state-owned enterprises, effectively alleviates the problem of difficult and
expensive financing for SMEs. The platform-based procurement and settlement
model helps the real economy develop; it facilitates the integration of information
from supply chains and capital chains. As a result, the supply chain is transparent
and open; vouchers are obtained in advance, the accounting period is clarified, funds
are flexibly coordinated, the capital situation of the supply chain is optimized, and
the capital chain is financed.
Business operation mode: The supply chain finance business of EPEC is mainly for
suppliers, providing them with commercial factoring and order financing business.
Factoring businesses are based on contract agreements signed between suppliers and
buyers, and factoring companies also participate in financing. Upon receiving the
supplier’s application, EPEC Factoring will review and approve it, and then issue the
funding amount. If the purchaser does not pay on expiration, the factoring company
has the right of recourse. EPEC platform serves as an intermediary in the order
financing business. The supplier logs on to the platform and submits the application,
which is summarized and sent to the bank, which will release the funds after the bank
has reviewed and approved the application.
6.3.2 Supply Chain Finance of China Railway Construction

Asset Management CO., Ltd

China Railway Construction Corporation Limited (CRCC), formerly known as the
railway soldiers, was established in Beijing on November 5, 2007 by the exclu-
sive initiative of China Railway Construction Co., Ltd., and it is a mega construc-
tion enterprise managed by the State-owned Assets Supervision and Administration
Commission of the State Council. On March 10 and March 13, 2008, CRCC was
listed in Shanghai and Hong Kong respectively (A-share code 601,186, H-share
code 1186), with a registered capital of 13.58 billion yuan. CRCC is one of the most
powerful and largest integrated construction groups in China and the world, ranking
59th in Fortune’s “World’s Top 500 Enterprises” and 3rd in “World’s 250 Largest
Contractors” in 2019. CRCC ranks 14th in the “Top 500 Chinese Enterprises” in
2018. The Corporation’s business covers engineering contracting, survey and design
consulting, real estate, investment services, equipment manufacturing, materials and
logistics, financial services and emerging industries. It operates all over China as
well as many countries or regions in the world. CRCC has developed from mainly
construction contracting to a complete industry chain incorporating research, plan-
ning, survey, design, construction, supervision, maintenance, operation and invest-
ment and financing, and has the ability to provide one-stop comprehensive services
to owners.

Established in March 2011 with a registered capital of 3 billion yuan, China Railway
Construction Asset Management Co., Ltd. is a wholly-owned subsidiary of China
Railway Construction Corporation Limited. At present, it has 2 wholly-owned
subsidiaries, 5 holding subsidiaries and 5 shareholding companies. The business
scope involves asset management, industrial fund, investment and financing manage-
ment and other fields. The positioning of the Company is an integrated service plat-
form of industrial chain finance and innovative finance that promotes the industry
with financing, helps the main industry and provides support for the transformation
and upgrading of CRCC. Between 2018 and 2019, its supply chain finance product
- CRCC Yinxin issued a total of 52.3 billion yuan, providing financing for suppliers
with 37 billion yuan, and the cumulative enquiry for collective procurement of CRCC
small goods exceeded 5.8 billion yuan, with a cumulative transaction amount of 3.426
billion yuan.
Procurement Mode
CRCC Mall integrates information, transaction, finance and management, and is
committed to solving the problems of source finding, price comparison, supplier
control, payment and settlement, process supervision and testification in dispute
for the procurement of CRCC and building a comprehensive “internet+ ” procure-
ment platform. In response to the problems of incomplete market information, low
transparency of procurement, narrow channels of supplier resources and compli-

cated payment procedures, CRCC Mall adopts seven modes for flexible procure-
ment, namely tendering procurement, enquiry procurement, framework procure-
ment, direct price comparison procurement, competitive procurement and group buy
bargaining.
Introduction of Yinxin
CRCC Yinxin platform is an online supply chain finance platform built by CRCC
using Internet and cloud computing technology. The platform is committed to solving
many problems such as difficulties in invoicing, payment, bill splitting, circulation
and financing for enterprises inside and outside the iron construction industry circle.
Based on the accounts payable of the member enterprises of CRCC as the ultimate
risk grip, the platform approves the credit line at 50–070% of the balance of the
supplier’s accounts receivable, pledges the accounts receivable, a commercial bank
provides a credit loans, and the supplier is the repayer of the loan. Partner Loan can
help suppliers obtain funds from banks with easy application, fast lending, flexible
repayment and favorable interest rates, optimize suppliers’ financing channels and
means, reduce suppliers’ capital costs, and thus improve the supply chain ecology
of CRCC’s member units (Fig. 6.4).
The fully online factoring platform of CRCC Yinxin provides independent credit
payment instruments for CRCC, increases liquidity for the whole CRCC system by
21 billion yuan, i.e. reducing interest-bearing liabilities by 21 billion yuan. On the
basis of risk prevention and control, CRCC Yinxin has enriched the internal payment
methods and provided a large amount of funds for the system members to relieve the
pressure of funds payment on the members. Up to now, the outstanding balance of
Yinxin is 21 billion yuan, and the discounted financing balance is 14 billion yuan.
Over the past two years, CRCC Yinxin has issued a total of 52.3 billion yuan, provided
Fig. 6.4 Business model of CRCC Yinxin

financing of 37 billion yuan for suppliers, and served over 3000 units in the system
and over 33,000 suppliers.
Advantages of Yinxin
Closed-loop process: the process of issuing and transferring Yinxin is highly inte-
grated with the sharing center to ensure that the issuance and internal circulation of
Yinxin is the true intention of the member units and fully meets the requirements
of the internal control system of the member units. The sharing of Ukey with the
finance company ensures the security and facilitates the operation and management
by the member units. The platform has been highly recognized by exchanges, dealers’
associations, approval departments of head offices of financial institutions, business
departments and information departments, who take the platform as a benchmark.
When Yinxin is due, through the establishment of direct financial and corporate
connection with the finance company and the signing of three-party withholding
agreement with member units, it has closed the loop of business and funds on one
hand, and simplified the approval procedures for payment due from member units
on the other hand, which has enhanced the deposit of funds at the finance company
by each unit and the settlement volume and concentration of CRCC at the finance
company; at the same time, it has also enhanced the efficiency of due clearing and
guaranteed the credibility.
Fast loan release: since June 2018, the platform has achieved loan release before
four o’clock in the afternoon on the same day for eligible financing applications,
ensuring a 24-h loan release commitment. The cost of external financing for small
and medium-sized suppliers is generally above 10%, and the discounting price of
commercial bills in the market is up to 15%, so Yinxin’s pricing of about 7% is
much recognized. In addition, Yinxin supports split financing, now more and more
suppliers choose split financing, which can reduce more costs. Of course, this also
has to be based on the fast loan release.
Diversified channels: First of all, the Factoring Company currently has a paid-up
registered capital of 1 billion yuan, which is the highest paid-up registered capital
in similar factoring companies, providing a large amount of self-owned funds for
supplier financing and an effective guarantee for obtaining financial resources from
financial institutions. Secondly, the platform has coordinated with many financial
institutions to solve the funding channels through direct financing, indirect financing
and asset securitization, direct bank loans and other ways to guarantee the rapid
demand for financing from suppliers. The lending amount reached 4.6 billion yuan
by February 4, 2019. Last year, we issued the first single supply chain ABN of
state-owned enterprises with Yinxin Assets.
Personalized financing: the current situation is that construction enterprises have
a long accounts payable period and a long invoicing period (more than one year),
and financial institutions do not accept factoring financing for invoices over 1 year
according to the current regulatory requirements, so we carry out asset disposal
through ABN/ABS, etc. after the completion of loan release to solve the problem of
overdue supplier financing invoices. We have built an invoice pool in the system to
avoid duplicate financing, and for the demand of a single invoice with huge amount
for multiple split financing, the amount used is registered in the invoice pool one by
one to ensure compliance.
Function diversification: through holding several demand forums for system
administrators and allowing member units and suppliers to put forward their opinions
and problems for the platform, more than 700 large and small demands have been
upgraded, which basically meets the various demands of member enterprises and
suppliers for the platform under the premise of ensuring security compliance.
Service systemization: at present, we have more than 30 people and have set up a
professional customer service system and set up a 400 telephone service platform, for
which the phenomenon of inaccessible and unanswerable phone calls has been funda-
mentally changed. In response to the needs of member enterprises, an administrator
contact group and a business communication group of each engineering companies
have been established to understand and solve the problems and needs encountered
by member units in the process of using Yinxin in a timely manner, and through more
than a year of efforts, a set of three-dimensional service system has been established.
6.3.3 Supply Chain Finance of China Railway Factoring

China Railway Commercial Factoring Co., Ltd. was incorporated in Nansha Free
Trade Port Zone of Guangzhou City on February 7, 2018 with a registered capital
of 1 billion yuan. It was jointly established by CRECG Capital Co., Ltd. (90% of
shareholding), a wholly-owned subsidiary of China Railway, and China Railway
Tunnel Group Co., Ltd. (10% of shareholding).
China Railway Commercial Factoring Co., Ltd. is one of the key members of
the financial sector of China Railway, one of the top 500 companies and brands in
the world, with its headquarters in Beijing. The Company is a new type of supply
chain finance service company of China Railway combining industry and finance
in response to the national call to improve the financial industry chain and provide
market-oriented, industrialized and online financing services.
Aiming to unite the internet thinking, China Railway Commercial Factoring Co.,
Ltd., relies on the huge industrial background of China Railway, and realizes the inte-
gration of quality resources within and outside the system. In line with the require-
ments of the strategy of combining industry and finance, the Company provides one-
stop supply chain financial solutions for the upstream and downstream enterprises in
the industrial chain of China Railway through the transfer of accounts receivable and
other forms with projects as the support, real trade backgrounds as the foundation,
risk control as the premise and big data as the basis of risk control, and promotes the
harmony and co-prosperity of the financial ecosphere of China Railway.
Introduction of E Credit
China Railway E Credit is the abbreviation of China Railway supply chain finance
credit vouchers, a corporate credit circulated on China Railway supply chain finance
platform. The credit vouchers issued through China Railway supply chain finance
platform reflects the real trade relationship between the two parties, and are a settle-
ment method similar to trade bills introduced by China Railway Factoring. All enter-
prises belonging to China Railway can act as issuing units and issue China Railway
E Credit vouchers to suppliers for payment in transactions.
China Railway E Credit is an electronic credit voucher issued by China Railway
and its member enterprises to their suppliers reflecting the credit and debt relationship
between the underlying contracts of the two parties and provides a new settlement
method and a convenient and low-cost new financing channel for upstream and
downstream enterprises in the supply chain of China Railway with the characteristics
of high credit, free splitting, independent transfer, arbitrary discounting, security and
high efficiency.
6.3.4 CCCC Supply Chain Finance

China Communications Construction Company Ltd. is composed of port and
highway design and construction units formerly under the Ministry of Communi-
cations, and has achieved great development with the support and assistance from
the Ministry of Communications and the provincial and municipal transportation
authorities. It is now a mega stated-owned enterprise regulated by the State-owned
Assets Supervision and Administration Commission of the State Council, world’s
largest port design and construction company, world’s largest highway and bridge
design and construction company, world’s largest dredging company, world’s largest
container crane manufacturing company, and the largest international engineering
contracting company in China. Currently, CCCC ranks 93rd in the Fortune 500, and
ranks 4thin the SASAC’s business performance assessment with “14 consecutive A”.
CCCC has global business coverage, a wide circle of friends, a strong industry
chain integration capability and procurement demand, more than 70 subsidiaries,
150,000 employees, 2.5 million labors, an annual new contract amount of 1.2 trillion,
an annual procurement scale of 400 billion yuan and a financing demand of100 billion
yuan.

CCCC Information Technology (Group) Co., Ltd. is responsible for CCCC Cloud E-
commerce Platform. The company was established in 2001 and is controlled by China
Communications Construction Company Ltd. CCCC Cloud E-commerce Platform
is built around the industrial layout of CCCC to establish ix core functional areas of
bulk procurement, auxiliary engineering materials, business travels, e-supermarket,
engineering labor subcontracting and supply chain financial services, create a new
ecology of industrial supply chain and form a new driving force of modern supply
chain.
Platform Experience and Effect

First, the online electronic tendering band bidding application has quickly achieved
practical results. Since its launch, the electronic tendering and bidding service has
realized the centralized management of the Group’s core materials and large equip-
ment procurement, with a cumulative transaction amount of 520 billion and a saved
amount of more than 10 billion, thus realizing cost reduction and efficiency improve-
ment and effectively improving the centralized procurement management level of the
enterprise. Second, the “greater procurement” strategy has been fully adopted and
practiced in all zones. Six special zones are set up for which different procurement
methods are used to achieve full coverage of enterprise procurement and imple-
ment the Group’s “greater procurement” strategy. Through agreements with major
customers, they have reduced costs and improved efficiency, with an overall saving
rate of about 10%. The third is financial innovation and credit empowerment to
achieve a win–win situation upstream and downstream of the supply chain. The plat-
form uses its own good credit to provide precision credit support for SMEs at all
levels and migrant workers in the industrial chain, serving 21 core enterprises and
883 suppliers with a cumulative financing scale of 3 billion and an average financing
cost of 4.5%. The fourth is capacity output to serve the development of the industry.
In terms of output of technical capacity, the platform helps customers build intelligent
procurement platforms and assists local state-owned enterprises to improve their own
procurement management level. In terms of output of e-commerce service capacity,
it empowers customers and shares the results of procurement. Eternal market is also
actively expanded and the cumulative procurement amount completed in the external
market exceeds 100 million yuan. The fifth is overseas procurement, cross-border
trade, and serving the “Belt and Road” initiative. An overseas procurement plat-
form is built to enhance the Group’s global resource allocation capability, and 8500
suppliers have joined the network, with overseas procurement amount exceeding 10
billion U.S. dollars. The industrial service system of “free port+ cross-border cloud
e-commerce+ cross-border cloud warehouse” is built to serve the “Belt and Road”
initiative.

In line with its own situation, CCCC explores the business model of “CCCC Self-
finance” with the background of real trade precipitated by CCCC Cloud E-commerce
at the front end and matching diversified capital sources at the back end, and builds
an open CCCC Self-finance Technology Platform (Fig. 6.5).
The supply chain finance of CCCC Cloud E-commerce is internet-based: using
internet technology to continuously empower supply chain finance; scenario-based:
fitting business scenarios of CCCC to create receivables/payables financing products;
closed-loop: relying on CCCC Cloud E-commerce to open up the whole industry
chain and form closed-loop management; integrated: providing standardized inter-
faces to create an open funding service platform; platform-based: funding platform,
payment platform, credit risk control platform, and technology platform.
CCCC combines technology-empowered finance with traditional procurement
business, strives to create a more complete and business-integrated scenario-based
Fig. 6.5 Supply chain finance of CCCC cloud E-commerce. Source CCCC Cloud E-commerce
application service platform with diversified product models, and forms a three main
supply chain finance businesses: the first is Easy Financing, which relies on real
orders between core enterprises and suppliers to provide low-interest, convenient
and efficient financing channels for suppliers; the second is ABS cloud platform,
which collects and transfers scattered accounts receivable to the special plan to issue
securitized products, which effectively reduces the cost of releasing products and
realizes low-cost financing; the third is Easy Bills, which is designed to connect
multi-level suppliers split and circulate financing services for suppliers and improves
financing efficiency through online “electronic vouchers”.
6.3.5 Supply Chain Finance of State Grid E-commerce

Under the provisions of the Company Law, State Grid Corporation of China is a
wholly state-owned enterprise under the direct management of the central govern-
ment, and it is a key backbone enterprise for the national economy and national
energy security. Power grids are State Grid’s core business, and its basic mission is
to ensure a safe, clean, economical, and sustainable supply of electricity. Over 88% of
the national territory is covered by the operation, which serves a population of more
than 1.1 billion people. In addition to its 829.5 billion-yuan registered capital, the
corporation has assets in the Philippines, Brazil, Portugal, Australia, Italy, Greece,
Hong Kong, and other countries and regions. In the performance appraisal of central
enterprises, the Corporation has received an A rating for 14 consecutive years, it is
in the Fortune 500, and it is the world’s largest public utility company.

State Grid Electronic Commerce Co., Ltd. (State Grid Xiong’an Financial Tech-
nology Group) was founded in January 2016. The company currently has nine
e-commerce platforms, including State Grid Mall, Comprehensive Energy, Cross-
border E-commerce, State Grid Business Travel, PV Cloud, Entrepreneurship and
Innovation & Youth Entrepreneurship, Big Data Credit, PV Cloud, and 95,598 Pay,
and its core business is to offer e-commerce and financial services. As of the end of
2018, the Company had 230 million registered users, with a cumulative transaction
volume of more than 700 billion yuan.
Management Mode
A basic management idea adopted by the e-commerce platform is centered on
procurement power and decentralized selection power, which adheres to one-level
platform control and two-level central procurement, selects a number of suppliers at
the same time to enter the e-commerce platform, and then users of all kinds make
secondary selections from the shortlisted suppliers. Through unified control, graded
management, and independent purchase, e-commerce procurement is uniformly
controlled by the headquarters. Three levels of procurement zones are created, and the
corresponding zones are graded and managed by the headquarters, provincial compa-
nies, and municipal companies, as well as end users who can make independent,
standardized purchases on the platform according to their actual needs.
Supply Chain Finance Product: Easy Digital Financing

Through the Easy Digital Financing big data product, the State Grid Data Center
and State Grid Yingda International Holdings Group Co., Ltd. have successfully
completed the first online verification and confirmation of rights of supplier accounts
receivable in State Grid Zhejiang Power Supply Company. Verification of supplier
accounts receivables was previously carried out offline, resulting in a large amount of
information and low verification efficiency. In order to establish an intelligent busi-
ness audit model, Easy Digital Financing’s chain finance solution communicates with
State Grid Zhejiang Power Supply Company’s ERP system to analyze contracts,
orders, and other material and financial big data. “Yingda Finance” enables the
Zhejiang State Grid Zhejiang Power Supply Company and Yingda Trust to approve
suppliers’ receivables in real-time and adjust financing quotas dynamically, which
greatly enhances the efficiency of credit checks and lays a digital foundation for
solving financing problems for SME suppliers. Taking advantage of the cloud plat-
form of Zhejiang Power Supply Company, the digital product has realized basic
data integration and data interconnection, fully utilizing the characteristics of the
cloud platform, as well as the efficient analysis of the MPP database and the elastic
deployment capability of Docker to implement cascading structure programs.
6.3.6 Summary of Experience in Building Supply Chain

Finance Platforms for SOEs
Authorization or Establishment of Professional Companies for Consolidated

Construction and Operation
Different platforms coordinate the relevant resources of their respective groups, the
procurement and related departments or the newly established science and technology
companies implement consolidated construction and operation, and the platform

achieves rapid development.
Platform business scope: extends from material procurement to service

procurement
Take Sinopec EPEC as an example, its business scope starts from procurement of
materials related to its main business, and then develops to office and staff living
materials/recycling materials, labor outsourcing, business travel services, logistics
and supply chain finance. The business scope of the other five enterprises is basically
extended in the same direction as the development of EPEC.
Vigorous Innovation in Supply Chain Finance Services

With the help of supply chain system and financial technology, supply chain finance
services have covered the transaction links of “order, inventory, logistics, receivables
and payables”, among which the innovative product of “credit empowerment” with
accounts payable as the financing object has developed most rapidly in a very short
period of time, and each platform has embodied different types of supply chain
finance innovations.
Development Direction of Platform: Extending from Serving Internal Market

to External Market
According to the maturity and scope of the platform, it can be divided into three
stages: primary, intermediate and advanced. The characteristics of the primary stage
are that individual business can cover external customers, and the four major e-
commerce platforms are all in this stage except EPEC. In the intermediate stage, they
have certain right of speech in the industry and initially become industry platforms.
Sinopec’s EPEC has certain characteristics of this stage and thus becomes a leader in
the construction procurement supply chain. The advanced stage is characterized by
becoming the industry standards and dominating the supply chain resource allocation
of the industry. No company has entered this stage yet, and this stage is also the future
development direction of the procurement supply chain system (Table 6.6).
In the future, the homogeneous competition of platforms will intensify. Therefore,
under the leadership of the group’s unified supply chain strategy, the construction of
universal and reusable intelligent supply chain infrastructure and consolidated oper-
ation is an important support to enhance the group’s supply chain competitiveness
and leads the industry development.
154
Table 6.6 Comparison among e-commerce and supply chain finance products of state-owned enterprises
Contents State Grid E-commerce Sinopec EPEC CRCC E-commerce China Railway Luban CCCC Cloud
E-commerce
Launch time 2016 2016 Version 1.0, September 2013 2016
2017
Version 2.0, July 2019
Initial – 9.4 billion yuan (2016) – – –
transaction
scale
Current Over 700 billion yuan 450 billion yuan 3.426 billion for small 310.08 billion yuan Cumulatively 520 billion
transaction (2016–2018) (2019) materials purchase (December 18, 2019) yuan for tendering and
scale 52.3 billion for CRCC bidding
Yinxin Cumulatively 55.956
billion yuan for scattered
materials and services,
etc
Long-term – 5000 billion yuan – – –
target scale
Business Procurement/business Procurement/business Procurement/business Procurement/business Procurement/business
scope travels/logistics/finance travels/logistics/finance travels/labor/finance travels/labor/logistics/finance travel/labor/finance
Supply chain Finance: Easy Digital Finance: Yiquantong, Finance: CRCC Yinxin Supply chain management Finance: Easy Bills
finance Financing, big data credit EPEC Standard Index
products
Service Intra-group Vigorously expanding the Intra-group Intra-group Mainly Intra-group,
objects market outside the group slightly extra-group
Operation The group establishes an The group establishes an The group designates The group designates original The group establishes an
modes e-commerce company and e-commerce company and original procurement procurement and related units e-commerce company
authorizes consolidated authorizes consolidated and related units for for consolidated operation and authorizes
operation operation consolidated operation consolidated operation
6 Introduction of Supply Chain Finance Solutions
Chapter 7
Risk Management in Supply Chain
Finance
In the previous chapter, we constructed a supply chain innovation model based on

the diffusion of innovation theory and briefly introduced the cases of five central
enterprises developing supply chain finance business. What kind of risks does the
supply chain finance business face? How should they be managed? This chapter will
elaborate on those questions.
7.1 What is Risk?
In classical decision theories, risk is the distance between what one expects to achieve
and the actual outcome. Risk in the narrow sense emphasizes the uncertainty of loss,
the result is always loss, while the possibility of profit is not part of risk in the narrow
sense; risk in the broad sense emphasizes uncertainty, which can result in loss, profit
or neither loss nor profit.
In finance, risk refers to the uncertainty of the difference between the actual
return on an investment and the expected return. It includes not only “downside risk”
(returns that fall short of expectations), but also “upside risk” (returns that exceed
expectations). Financial risk can be market-dependent risk due to a number of market
factors, or operational risk due to fraud. Financial risk can result in the loss of part
or all of the original investment. Financial risk can often be assessed through the
historical behaviors and results of investment.
The relationship between risk and return is crucial in the financial world. The
greater the potential return a person seeks, the greater the risk he or she has to take.
The pricing of financial instruments in a free market reflects this principle: Strong
demand from traders for safer financial instruments pushes up their prices and lowers
their promised returns; conversely, weak demand from traders for riskier financial
instruments lowers their prices and increases their promised returns.

https://doi.org/10.1007/978-981-19-3513-8_7
156 7 Risk Management in Supply Chain Finance
In financial markets, there may be a need to measure credit risk, information

timing and source risks, probabilistic model risks, operational risks and legal risks.
With the automation of the financial market, the concept of “real-time risk” is also
gaining attention.
7.1.1 Supply Chain Risks
To date, there is no uniform, standardized definition of supply chain risks. Supply

chain risks are mainly divided into endogenous and exogenous risks. Endogenous
risks include, but are not limited to, moral risks, information transmission risks,
production organization and procurement risks, risks arising from the selection of
distributors, logistics operation risks, risks arising from differences in corporate
culture; exogenous risks include, but are not limited to, market demand uncertainty
risks, economic cycle risks, policy risks, legal risks, accidental disaster risks, etc.
If the above risks lead to the untimely supply of raw materials in a certain link of
the supply chain, it may lead to the imbalance of the healthy operation of the whole
supply chain.
7.1.2 Links of Supply Chain Finance Risks
Supply chain finance risks refer to the uncertainty that in a certain economic envi-
ronment, the expected operation of logistics, capital flow, and information flow of
upstream and downstream enterprises, and all other participants, does not occur as
expected, resulting in losses to the enterprises involved in supply chain finance.
A close supply chain network can greatly shorten the cash flow cycle, lowering
operating costs, and solving the capital problems of each link in the chain. But
as a “double-edged sword”, it also poses certain risks to supply chain enterprises.
There are two perspectives on supply chain finance risks: On one hand, when
supply chain enterprises provide financial services (such as factoring, loans, etc.),
they may be exposed to different exogenous risks; on the other hand, supply
chain finance is embedded in corporate business (receivables financing, inventory
financing, prepayment financing modes), which may present their own endogenous
risks.
Exogenous Risks in Supply Chain Finance

Exogenous risks refer to changes in the economic cycle, financial environment, and
policy. In this analysis, we consider three main aspects: macroeconomics, policy and
regulation environment, and market finance environment.
(1) Macroeconomic Cycle: Supply chain finance operates in a certain economic

climate. Comparatively to traditional trade business, financial activities entail
7.1 What is Risk? 157
a wider range of industries, financing platforms, and liquidity providers. If the

economic environment fluctuates, the entities of each link in the supply chain
finance model will face greater risks, thereby increasing the capital risk of the
whole chain. When market demand is weak, especially in economic downturns
or recessions, supply chain enterprises often face difficulties in survival and
operation and even bankruptcy, resulting in the loss of good credit guarantees
for financial activities.
(2) Policy and Regulatory Environment: With the rapid growth of the market
and the expansion of enterprises, financial instruments are continually being
innovated to meet market demand. Additionally, non-financial enterprises can
operate financial businesses if they obtain the necessary qualifications and abide
by relevant laws and regulations. A supply chain trading company can, for
example, engage in factoring, lending, and finance leasing. Supply chain finance
activities are likely to be adversely affected by policy or regulatory changes,
such as increased regulation or restrictions on financial services that supply
chain trading enterprises can offer.
(3) Financial Environment: Income from interest rate differentials is the main
source of profit for supply chain finance businesses. In supply chain finance busi-
nesses, the profit margin is relatively high when the financing cost is less than the
interest income earned. Supply chain finance becomes unprofitable if the cost of
capital rises and the financing cost increases, especially when the market interest
rate fluctuates greatly, which can even lead to financial strain on enterprises in
various links of the supply chain and make the financing uncollectible.
Endogenous Risks of Supply Chain Finance

During operation, supply chain enterprises provide different financing models in the
procurement, inventory, and sales stages, transfer the capital risk, and obtain capital
gains with a high gross margin. We will analyze the risks from two aspects: Operation
and finance.
(1) Operational Risks

Supply Chain Correlation Risks: Supply chain enterprises can manage supply
chain finance risks through the tracking and management of each link in a more
integrated supply chain system. The flow of funds in the supply chain business is
closed. Furthermore, procurement, production, sales, warehousing, distribution and
others in the same area of business all have high degree of correlation, so close and
smooth cooperation is possible. The uncontrollable risk caused by the loophole in
financing may affect the supply chain finance business if the supply chain enterprises
are not well correlated.
Credit Risks of Upstream and Downstream Enterprises in the Supply Chain:
A good credit status is a prerequisite for a supply chain finance company to operate
normally. Upstream and downstream enterprises’ credit rating reflects their willing-
ness and ability to repay debts to some extent. Due to SMEs’ poor credit status and
the lack of a sound credit system in China, low default costs may result in delayed
debt repayment or recovery difficulties, and higher supply chain finance risks.
Supply Chain Trade Background Risks: False trade financing of supply chain
refers to loans obtained with false business documents while funds are transferred
to speculative or investment businesses, resulting in huge losses for the financial
business provided for the supply chain enterprises.
Supply Chain Management and Operation Risks: Supply chain finance business
is based on the effective integration and management of each link in the supply chain.
The supply chain enterprises make use of their professional management capability
to promote close cooperation and coordination between each link and each entity,
and also set higher standards for the professional level of supply chain enterprises.
Supply chain risks may get out of control when management mechanism issues arise
in supply chain enterprises; from the perspective of supply chain operations, the
operation status of upstream and downstream enterprises determines whether the
supply chain can function normally. When the business operation of an enterprise
deteriorates, the flow of business, material, and information will incoherence, the
capital flow will break, and the supply chain finance chain will collapse.
(2) Financial Risks
Asset Liquidity Risk: A supply chain enterprise that provides financing services for
SMEs in the chain through credit sales and advances, will confront large-scale prepay-
ments and receivables. A delayed recovery and early expenditure of funds will reduce
the enterprise’s capital efficiency and put pressure on its operating funds. Business
expansion could be hampered by liquidity problems caused by large prepayments or
receivables.
Debt Financing Risk: While providing financial services, supply chain enterprises
have a large demand for external funds, and maintain the development of financial
business through continuous debt financing. During this specific process, enterprises
use their own creditworthiness as a possible guarantee to obtain loans from banks
and other institutions, and then lend funds to other SMEs via trade or finance to
obtain capital arbitrage. Hence, the debt burden of supply chain enterprises is high.
Increasing scale will increase leverage, which may hinder refinancing, and the high-
leverage, heavy-debt business model will increase supply chain finance risk exposure.
Large advances and credit sales can lead to large outflows of funds and lengthy
recovery periods, which are not conducive to liquidity accumulation. The operating
cash flow of the enterprise is poor and the enterprise relies on external financing to
fund its operation and repay its debt, resulting in a higher funding pressure. Capital
chain ruptures may occur if external financing is blocked.
7.2 Risk Management of Supply Chain Finance 159
7.2 Risk Management of Supply Chain Finance
7.2.1 Risk Management
Risk management refers to the process of identifying, analyzing, and identifying

risks to determine the most efficient and effective way to mitigate them and achieve
maximum security at the lowest cost.
Introduction to Risk Management

A prioritized approach to risk management would start with those risks that have the
greatest potential for loss (or impact) and have the highest probability of occurrence,
then move on to those with a lower probability of occurrence and lower losses. Risk
assessment can be difficult in practice, and the resources available to mitigate risks
may be imbalanced. Risks with a higher probability of occurrence but lower losses
can be mitigated by these resources. Supply chain finance risks are managed in the
same way.
Lack of knowledge can create knowledge risk; ineffective collaboration can create
relationship risk; and inefficient operating procedures can result in process partici-
pation risk. The risks directly reduce knowledge-based workers’ productivity, cost
effectiveness, profitability, service, quality, reputation, brand value, and profitability.
By identifying and mitigating intangible risks that reduce productivity, intangible
risk management can have a significant impact on supply chains and supply chain
financing solutions.
Identifying opportunity costs is a challenge for risk managers. When to spend
resources on risk management and when to spend those resources elsewhere can be
difficult to determine. An ideal risk management minimizes expenditure (or HR
and other resources) and the negative impact of risk. Supply chain finance risk
management requires a careful analysis of opportunity costs.
Principles of Risk Management

International Standardization Organization (ISO) defined risk management as
creating and protecting value. This is done by improving performance, encouraging
innovation, and supporting objectives.
Effective risk management requires eight elements:
Integrated: Risk management is an integral part of all the organization’s activities.
Structured and Comprehensive: A structured and comprehensive approach to
risk management helps to achieve consistent and comparable results.
Customized: Risk management frameworks and processes are customized to the
external and internal environment of the organization in relation to its objectives.
Inclusive: Stakeholders are engaged in an appropriate and timely manner so that
their knowledge, views and perspectives can be incorporated. This allows them
to raise awareness and manage risks wisely.
Dynamic: As the organization’s external and internal environment changes,

risks may appear, change or disappear. Risk management anticipates, monitors,
captures and responds to these changes and events in an appropriate and timely
manner.
Optimal Information: Risk management inputs are based on historical and
current information, as well as future expectations. Risk management explic-
itly takes into account any limitations and uncertainties associated with such
information and expectations. Information should be made available to relevant
stakeholders in a timely and clear manner.
Human Factors: Human behaviors and culture have a significant impact on all
aspects of risk management at every level and stage.
Continuous Improvement: Risk management is continuously improved through
learning and experience.
Steps in Risk Management

In most cases, the approach to risk management consists of the following elements:
Identifying threats;
Assessing the vulnerability of critical assets to specific threats;
Identifying risks (i.e. the expected likelihood and consequences of a particular
type of attack on a particular asset); and identifying ways to mitigate these risks;
Prioritizing risk reduction measures.
According to the 2018 edition of ISO 31000 Risk Management Principles and
Guidelines, the risk management process consists of six steps: Communication and
consultation, definition of the scope, environment and guidelines, risk assessment,
risk response, monitoring and review, and documentation and reporting.
(1) Communication and Consultation: Communicating and consulting help
stakeholders understand the risks, identify the basis for decisions, and explain
why certain actions are needed. During consultation, feedback and informa-
tion are obtained to support decision-making. The exchange of truthful, timely,
relevant, accurate and understandable information should result from close coor-
dination between the two. Stakeholders at all stages of the risk management flow
and throughout the process should be consulted.
Communication and consultation have four purposes: Firstly, to provide expertise in
different areas of risk management. Second, to ensure that different perspectives are
taken into account when defining risk criteria and assessing risks. Third, to ensure
that monitoring and decision-making can be performed effectively. The fourth goal
is to make those affected by risk feel they own and are accountable.
(2) Definition of the Scope, Environment and Criteria: Scope, environment,
and criteria define the risk management processes in a targeted manner to
enable effective risk assessment and appropriate risk response. Definition of
scope, environment, and criteria involves understanding the external and internal
environments.
Defining the scope—An organization should define its risk management activities. It
is crucial to consider the scope, related objectives and alignment of the risk manage-
ment process with organizational goals at different levels (e.g. strategy, operation,
program, project). The following factors should be considered when planning the
approach: Objectives and decisions, expected outcomes of the steps, time, location,
specific elements to be included and excluded, appropriate risk assessment tools and
techniques, resources, responsibilities and records required, and relationships with
other projects, processes, and activities.
External and internal environments—The external and internal environments form
the basis of the organization’s ability to plan for and achieve its objectives. In order
to properly understand the risk management process context, it is important to under-
stand the external and internal context in which the organization operates. This
context should then reflect the specific context of the activities that are part of the
risk management process.
Definition of risk criteria—Organizations are advised to identify the number and
types of risks that are likely to occur in relation to their goals. Criteria should also be
developed for assessing the significance of risks and informing the decision-making
process. It is critical that risk criteria are aligned with the risk management framework
and tailored to the specific scope and purpose of the corresponding activity.
In order for risk standards to be effective, they must reflect the values, goals, and
resources of an organization and be consistent with its risk management policies and
statements. In defining standards, organizations should consider their obligations and
stakeholders’ viewpoints. It is important to establish risk criteria at the outset of the
risk assessment process; however, they should be continuously updated and revised
as necessary.
To formulate risk standards, it is necessary to consider the following factors:
First, the nature and type of uncertainties that may affect results and (tangible and
intangible) objectives; the second is how to define and measure (positive and negative)
consequences and their possibilities; third, the factors related to time; fourth, the
consistency of measurement methods; fifth, how to determine the risk level; sixth,
how to consider the combination and sequence of multiple risks; seventh, the ability
of the organization.
(3) Risk Assessment: The process of risk identification and risk analysis is known
as risk assessment. The assessment of risk should be systematic, iterative,
and collaborative, taking into account the perspectives and knowledge of
stakeholders. This work should be based on the best available information,
supplemented when necessary by further investigation.
Risk identification—Risk identification is the process by which an organization
recognizes, defines, and describes the risks that may serve or hinder its objectives.
The identification of risks requires relevant, accurate, and current information. It is
possible for an organization to identify uncertainties that may affect one or more of
its goals by utilizing a variety of techniques. Risks should be identified regardless of
whether their sources are within an organization’s control. It is important to consider
the possibility that a variety of outcomes could result in a number of tangible or

intangible consequences.
Risk analysis—Risk analysis is conducted in order to ascertain the nature and
characteristics of risk, as well as the appropriate level of risk. In assessing risk,
one must consider uncertainty, sources, consequences, likelihood, events, scenarios,
controls, and their effectiveness. An event can have multiple causes and consequences
and may affect multiple targets. There is a wide variety of risk analysis techniques
that can be undertaken at different levels of complexity and detail, depending on
the purposes of the analysis, the availability and reliability of information and the
resources available. The analysis method may be either qualitative or quantitative,
or both, depending on the context and intended use.
An evaluation of risk should take into account factors such as likelihood of events,
nature and severity of consequences, complexity and connectivity, time-related
factors and volatility, effectiveness of existing control measures, and sensitivity and
confidence levels.
Differences of opinion, bias, perceptions and judgement can influence risk anal-
ysis. The quality of the information used, the assumptions made, the limitations of
the technology, and the manner in which it is performed are also influencing factors.
Decision-makers should be informed of the effects of these factors.
Quantifying highly uncertain events is difficult. Analysing highly uncertain events
can be challenging. Using a combination of techniques will often improve the
analyst’s insight. An analysis of risk includes determining whether and how to
respond to risks, and deciding how to respond. As a result of analysis and judgment,
decision makers gain a better understanding of how to make choices for different
types and levels of risk.
Risk assessment—The purpose of risk assessment is to support decision-making.
Risk assessment involves comparing the results of risk analysis with the identified
risk criteria. A decision maker may choose to do nothing, consider risk handling
options, conduct further analysis to better understand the risk, maintain existing
controls, or reconsider objectives.
External and internal stakeholders should be considered in decision making.
Organizations should document, communicate, and validate the results of their risk
assessments.
(4) Risk Response: Risk response is selecting and implementing options to deal
with risks. The risk response process includes the following iterative processes:
first, development and selection of risk response options; second, planning and
implementation of risk response options; third, assessing the effectiveness of the
response; fourth, deciding if remaining risks are acceptable; and fifth, adopting
further response strategies if existing strategies fail.
Selection of risk response options—Choosing the best risk response option involves
balancing the benefit of implementing the option versus its cost or disadvantage.
The choice of risk response is not only based on economic considerations, but also
on the organization’s obligations, voluntary commitments, and stakeholder perspec-
tive. Risk response options should be selected based on the organization’s objectives,
risk criteria, and resources.
The organization should consider the values, concepts, and potential participation
of stakeholders when selecting a risk response option. Additionally, communication
and consultation with them should be considered. Risk response schemes are equally
effective, but some stakeholders are more open to them than others.
The organization should consider the values, concepts, and potential participation
of stakeholders when selecting a risk response option, as well as the best way to
communicate and consult with them. Risk response schemes are equally effective,
but some stakeholders are more open to them than others.
However carefully designed and implemented, risk response may fail to produce
the expected results. Monitoring and review are critical to ensuring the effectiveness
of different risk response programs.
Risk response schemes may also introduce new risks. If no response is available,
or if the response does not reduce the risk sufficiently, the risk should be documented
and monitored.
Policymakers and stakeholders should be aware of residual risks after risk
handling. It is important to document, monitor, review, and consider further treatment
if necessary.
Preparation and implementation of a risk response plan. By specifying how the
selected treatment plan will be implemented, the risk response plan allows relevant
personnel to understand the arrangement and track its implementation progress. The
sequence in which the risk response options should be implemented should be clearly
defined.
In consultation with stakeholders, the response plan should be incorporated into
the management plans and processes of the organization. The response plan should
include the following information: first, reasons for selecting the response plan,
including the expected benefits; second, personnel responsible for approving and
implementing the plan; third, the proposed actions; fourth, the required resources,
including unanticipated circumstances; fifth, the measurement of results; sixth, the
limitations of the response plan; seventh, reporting and monitoring requirements;
and, last, when to take action and complete the plan.
(5) Monitoring and Review: Monitoring and review is to ensure and improve the
process design, implementation and results. In the risk management process,
continuous monitoring and regular review of the risk management process and
its results should be a part of the plan.
Monitor and review includes planning, collecting and analyzing data, recording
results, and providing feedback.
Monitoring and review results should be integrated into performance manage-
ment, measurement, and reporting activities.
(6) Recording and Reporting: Risk management processes and results should be
documented and reported through appropriate mechanisms.
It serves four purposes: first, to communicate risk management results and activities
throughout the organization; second, to inform decision-making; third, to improve
risk management activities; and fourth, to facilitate interaction with stakeholders,
including those who are responsible for risk management activities.
Documenting risk management processes and results includes the creation, reten-
tion, and processing of information, each of which needs to be done with due consider-
ation to the use, sensitivity, and internal and external environment of the information,
as well as careful documentation.
A reporting mechanism is an integral part of organization governance, and it is
recommended to improve the quality of dialogues with stakeholders and assist top
management and supervisory bodies. In reporting, there are four aspects to consider.
First, stakeholders and their specific information needs. Second, cost, frequency,
and timeliness of reporting. Third, reporting methods; and fourth, relevance to
organizational objectives and decision-making.
Choice in the Face of Risks

Risk mitigation measures for risk management are generally categorized as follows:
first, design new business processes with sufficient risk control and containment
methods from the beginning; second, periodically assess the risks accepted as normal
characteristics of business operations and modify mitigation measures; third, transfer
risks to external institutions, such as insurance companies; and fourth, avoid any risk,
e. g. close high-risk businesses.
Studies suggest that the financial benefits of risk management are less dependent
on the criteria used and more dependent on the frequency and implementation of risk
assessments.
Following the identification and evaluation of risks, all risk management tech-
niques can be classified into the following four categories: first, risk avoidance;
second, risk prevention; third, risk sharing; and fourth, risk retention.
Risk Avoidance
Risk avoidance means actively avoiding activities that might cause losses, such as
refusing to fly for fear of hijacking. Risk avoidance may eliminate risks fundamen-
tally, but it also means losing the potential benefits that come from accepting risks.
Investing in an enterprise reduces the chances of loss and loss of profit.
Risk Prevention
Risk prevention is the process of reducing the possibility and degree of loss. Exam-
ples include building water conservancy projects and shelterbelts. Taking preventive
measures should be undertaken if the losses are much greater than the costs of
prevention.
Risk Sharing
Risk sharing is simply “sharing loss or benefit from risk with another party”.
It is often assumed that risk can be transferred to a third party through insurance or
outsourcing. If an insurer or contractor goes bankrupt or ends up in court, the initial
risk still returns to the first party. Similarly, buying an insurance contract is called
“risk transfer”. Although technically, the buyer of the contract retains liability for
“transferred” losses, which means insurance should more accurately be described as
an ex post facto compensation mechanism. In the case of car insurance, the risk is
not transferred to the insurer. Risk remains with the insured, i.e. the person involved.
Methods of managing risk can fall into more than one category. While technically
a risk retention pool retains the risk within the group, spreading the risk across the
group involves the transfer of risk between the group members and is thus more
appropriate as a risk transfer mechanism. Traditional insurance differs from this in
that no premiums are exchanged between members in advance; rather, losses are
assessed to all members.
Risk Retention
Risk retention is the acceptance of loss or gain from the risks. It is a viable strategy for
dealing with small risks where over time, the cost of managing the risk will exceed
the losses incurred. By default, all risks cannot be avoided or transferred. In the case
of war, most property and risks are not insured against “war risk,” so losses are borne
by the insured. Additionally, any potential loss (risk) in excess of the insured amount
constitutes risk retention. Risk retention is also acceptable if there is a low probability
of a very large loss, or if the cost of insuring a larger sum prevents the achievement
of the organization’s objectives.
Risk Management Plans

Development of a Plan
Reduce the risk using appropriate control measures or countermeasures. Risk miti-
gation must be approved by management. Top management makes decisions based
on risks to the organization’s image, and IT management determines how to respond
to computer virus risks.
Effective security control mechanisms should be proposed in the risk management
plan. Like antivirus software that can mitigate the high risk of computer viruses, a
good risk management plan should include a timeline for the implementation of
control measures and the person responsible for relevant actions.
Achievement of the Plan
Take all steps to reduce the risks. Purchase policies for risks that have been trans-
ferred to insurers, avoid all risks that can be avoided without sacrificing the entity’s
objectives, reduce other risks and keep the rest.
Review and Evaluation of the Plan
Risk management plans will never be perfect. As a result of practice, experience,
and actual losses, plans will need to be amended and information provided so that
different decisions can be made regarding risks.
Management plans and risk analyses should be updated regularly. There are two
main reasons: Firstly, to assess whether previously selected security control mecha-
nisms are still appropriate and effective; and secondly, to assess any changes in the
level of risk in the business environment. Information risk, for example, is one of the
most important new risks in a rapidly changing business environment.
7.2.2 Supply Chain Risk Management
The supply chain risk management strategy reduces vulnerability and assures conti-
nuity by continuously assessing risks throughout the supply chain. It is the use of
risk management processes to address logistics-related risks and uncertainties in the
supply chain, either with supply chain partners or on their own.
Resilience
The four steps of supply chain risk management are identification, assessment,
control, and monitoring. Because supply chains are complex, these processes may not
function properly to ensure all contingencies are covered. As a result, cause-driven
supply chain risk management is often combined with supply chain resilience, which
aims to ensure that the supply chain can withstand and recover from risks. Thus, the
supply chain’s resilience is its adaptive capacity.
Time to Recover
Time to recover (TTR) is one of the key indicators first introduced by Cisco and
adopted by the Supply Chain Risk Leadership Council (SCRLC). The TTR measures
when a company returns to full production after a disruption in the supply chain.
A major incident has rendered the facility essentially unusable, requiring extensive
repairs and renovations as well as re-purchasing and re-qualifying critical equipment.
Measurement of Risks
Supply chain risk is a function of the likelihood of an event occurring and its impact
and is the most widely used way to assess risk. In order to calculate supply chain
risks using this method, it is necessary to evaluate the likelihood and probability of
many different event types across N supply chain locations (potentially thousands of
locations). The range of probabilities is therefore very wide. This approach usually
works for a smaller subset of sites. Companies tend to use risk scores to measure risks,
and there are many different indicators, such as financial risk scores, operational risk
scores, flexibility scores, etc., that are readily available, easy to analyze, and can be
used effectively and easily understood.
Proactive Risk Management

85% of companies reported at least one supply chain disruption in 2011, according to
a survey by The Business Continuity Institute (BCI) and Zurich Insurance. Respon-
dents also noted that 40% of disruptions came from sub-suppliers rather than their
direct suppliers. Risk management is therefore crucial.
Contingency Plans
A risk management plan can include stock management, consideration of alterna-
tive procurement arrangements, business interruption/accident insurance, risk assess-
ment and review, awareness campaigns and training plans, use of big data analysis
and continuous monitoring to predict security measures, redundancy optimization,
deferral and collaborative operation.
7.2.3 Risk Management of Supply Chain Finance
Principles of Supply Chain Finance Risk Management

Traditional supply chain finance requires a high level of offline risk control capability.
A company must establish a complete risk control system, clarify the elements of
verification and leave no detail untouched. Staffing should be reasonably arranged to
form a mechanism of mutual supervision. Through the improvement of the system,
operational and moral risks are reduced.
The risks of the supply chain itself may affect supply chain finance, in addition
to the exogenous and endogenous risks of supply chain finance. Professor Song Hua
has summarized the principles of supply chain risk management (Table 7.1).
Table 7.1 Principles of risk management in supply chain finance

Aspects Principles
Business closure The entire supply chain is organically linked, rationally
organized and orderly operated, forming a complete cycle
from initial value extraction to final value delivery and value
realization
Verticalization of management Specialized management of individual management activities
and areas, with no subordination or overlap between them
Self-repayment of income The proceeds of supply chain operations or from firm future
cash flows generated are used as the source of direct
repayment. Risk management tools include pledges and
mortgages of movable assets, documentary controls (tax
refund entrustment, domestic letters of credit), unlimited
personal joint and several liabilities and bundling of related
party liabilities
Informatization for transactions Information communication within an enterprise or
organization, and informatization for process management of
supply chain operations
Risk structuring The business is reasonably structured so that any possible
risks can be neutralized by various effective instruments or
combinations of instruments, including insurance, guarantees
and undertakings, agreements and the establishment of risk
reserves
Source Based on Supply Chain Finance (2nd Edition) by Song Hua
Risk Assessment Indicators for Supply Chain Finance

The key to preventing possible risks is to establish a national credit management
system and improve the standardization of financial instruments in the transaction
process. Before that, it is necessary to establish a relatively unified risk assessment
index system, through which supply chain information such as financial, business
processes and business prospects of the supply chain can be reflected, as a basis for
financial risk assessment. The supply chain involves production and distribution, and
connects to wholesale, retail and end-users, and it is a social reproduction process and
a social recycling process, relating to the whole processes of an enterprise from raw
material procurement to production, sales and end-users. Therefore, the assessment
of supply chain finance risks does not lie in the existence of small and medium-sized
non-performing assets, but in the possibility of completing the transaction and the
assessment of the future expected return of the whole supply chain. In other words,
the transaction risk in the supply chain constitutes the financial risk in the supply
chain. A framework of risk assessment indicators can be established, with statistical
indicators covering the level of financial value, the level of business processes, the
level of feedback services and the level of expected development, thus paving the way
for the establishment of standard financial instruments and transaction procedures
(Table 7.2).
Supply Chain Finance Risk Management Enabled by Fintech

For traditional supply chain finance, the biggest loophole and risk point is the credit
risk under incomplete information and moral risk under asymmetric information.
Banks are reluctant to engage in business with upstream and downstream SMEs or
require excessive lending rates as a margin of safety. At the same time, because of
the high value, rapid frequency and wide area of the upstream and downstream trade
chains, it is difficult to obtain true, effective, timely and low-cost information at a
reasonable cost using traditional means of information collection and processing.
The use of financial technology such as big data risk control, “blockchain + IoT”
and AI technology will mitigate the problems highlighted in the traditional supply
chain finance business one by one.
(1) Use big data risk control systems to reduce credit risk under incomplete
information.
In the traditional credit business of banks for SMEs, because of the small scale of
business and the lack of complete statements, they often have to use the property
mortgage of SMEs as a single credit instrument, and do not have a complete grasp
of the operation and industrial chain situation of SMEs. In the event of credit risk,
banks are faced with numerous procedures and processes to dispose of the collat-
eral, which is relatively efficient. The big data risk control system is used to reduce
the credit risk under incomplete information, and the template information collec-
tion method is adopted for examination before the approval of loans to make the
supply chain finance risk control model data-based and dynamic. All-round anal-
ysis and mining of massive data such as customer’s financial data, production data,
electricity and water consumption, order quantity, wage level, assets and liabilities,
Table 7.2 Risk assessment

Aspects Indicators
indicator system of supply
chain finance Level of financial value Average supply investment of the
supply chain
Average inventory turnover days of
the supply chain
Average cash turnover days of the
supply chain
…
Level of business Effective delivery time
processes Order fulfillment rate
Management cost rate of supply
chain logistics
Cost reduction rate of Supply chain
core products
New product sales ratio
Production flexibility
Supply chain value added rate
…
Level of feedback Total order cycle time
services User satisfaction rate
User maintenance rate
Supply chain response time
…
Level of expected Expected volume of fund
development requirements
Expected number of fund flow tiers
Expected number of enterprises in
the ecosystem
cash flow, investment preference, success or failure ratio, product cycle, safety stock,
sales distribution, technical level, R&D investment, etc. can objectively reflect the
status of enterprises, realize real-time risk early warning, improve the speed of credit
evaluation and approval, and reduce the credit risk under incomplete information.
Relying on Alibaba’s absolute dominance in e-commerce, MYbank provides a
full range of supply chain finance services such as credit purchase with inventory,
pledge of accounts receivable and inventory financing to small and SMEs upstream
and downstream of its 1688.com, Tmall Supermarket, Cainiao and other business
platforms. Based on the big data risk control model, they use the massive database of
e-commerce platforms such as Taobao and Tmall to audit the factors of the borrower’s
identity, credit, flow, inventory, sales volume, operating income and other operating
conditions, and access Kingdee, UFIDA and other enterprise-grade service platforms
to cross-verify the borrower’s comprehensive business information, reduce the risk
of incomplete information through big data analysis, and provide online real-time
loan services for SMEs. The examination and approval process can be completed
within as soon as one minute.
(2) Blockchain + IoT model reduces moral risks under asymmetric information.
Blockchain
Blockchain is essentially a distributed ledger database with features such as encryp-
tion, immutability and traceability. Blockchain technology can improve the overall
efficiency and quality of supply chain finance, reduce the cost of trust, and alle-
viate the financing dilemma of multi-tier suppliers. Blockchain-based supply chain
finance solutions can establish a network of alliance chains in a node-controllable
manner, covering upstream and downstream enterprises, financial institutions,
finance companies, banks and other trade financing participants in the supply chain.
Through the distributed ledger of blockchain, the transaction information between
the upstream and downstream of the supply chain is incorporated into a unified infor-
mation platform. This allows all parties involved to understand the information in a
timely and accurate manner and confirm the accuracy of the transaction information
through consensus authentication, and prompts enterprises with financing needs to
register their contracts, debts and other proofs on the chain, which can ensure that
these assets and interests cannot be tampered with or copied after digitization.
Through the automatic contract system blockchain, the transaction procedure
is pre-defined before the transaction, and the automatic contract system is used
to complete the transaction process automatically after the transaction passes the
blockchain consensus authentication, so as to improve the efficiency and security of
supply chain management and reduce the moral risk under asymmetric information.
In addition, when a dispute arises, it is easy and highly feasible to produce evidence
as all information is open, transparent and traceable, which is conducive to the rapid
resolution of disputes.
In 2018, Huaxia Bank launched the “Blockchain + Supply Chain” product—
“Chain to Xiong’an—Blockchain—Supply Chain”, which was based on the credit
of Xiong’an Group and used the blockchain platform for data traceability, behavioral
regulation and fund management to solve funding problems for Xiong’an construc-
tion subcontractors such as workers’ wages and raw material procurement. Through
the coordination with the blockchain project management platform of Xiong’an
Group in the form of direct linkage between banks and enterprises, products such
as “Platform Tongbao” and “Cross-bank Tongbao” were launched to effectively link
the upstream and downstream capital chains and information flow of platform enter-
prises and provide personalized, integrated and low-cost supply chain solutions for
more than 130 industrial internet enterprises. On June 15, 2018, the first loan was
issued, which took the “flood interceptor” project as the application scenario, and
provided order financing to a road and bridge company from Hebei, a subcontractor
of the general contractor of the flood interceptor, CCCC First Harbor Engineering
Co., Ltd., with a total credit amount of 4 million yuan and the first loan amounting
to 850,000 yuan.
IoT
With the advent of 5G commercialization, the “Blockchain + IoT” supply chain
finance model has further improved the accuracy, security and operational efficiency
of the transaction system. For banks, the IoT technology solves the problem of logis-
tics and inventory supervision of pledged movable assets and reduces the financing
cost of banks. Due to the difficulty of supervising pledged movable assets, banks are
more inclined to lend on real estate than on movable assets, and this has resulted in
difficulties in financing SMEs with a high proportion of movable assets. IoT can use
sensor technology, positioning technology and navigation technology to realize data-
mation and visualization in the transaction process (especially in the warehousing and
shipment process), and upload IoT data to the blockchain in real time through commu-
nication technology to reduce the error rate and moral risks in manual registration
of information and improve efficiency.
Ping An Bank is an early developer in the auto finance sector, and its research
and development and application of fintech is outstanding among its peers, be it
in auto mortgage loans in retail business or warehouse receipt pledge or advance
financing in supply chain finance. In 2018, Ping An Bank’s new auto finance loan
disbursements amounted to 147.668 billion yuan, an increase of 24.7% year-on-year,
with automated approvals accounting for 75% of the total. Through the “Blockchain
+ IoT” model, the RFID tags installed on vehicles, RFID readers in parking lots,
wireless cameras, GPS positioning devices, gravity sensors and the data information
platform behind them can be used to locate and monitor movable pledges (cars) in real
time. In addition, the introduction of the blockchain information interaction platform,
the blockchain’s automated consensus authentication ensures the consistency and
accuracy of information obtained by all parties.
During the loading and unloading process, the weight of the incoming goods can
be collected in real time by gravity sensors, and the location of the warehouse where
the incoming goods are stored can be monitored and collected by the positioning
equipment in real time, and the weight data collected by the front-end equipment
can be automatically compared with the weight data entered to determine whether
the loading and unloading is completed. After the incoming goods are loaded or
unloaded, the scanning equipment scans them in 3D profile, and the warehouse receipt
management platform generates relevant warehouse receipts according to the ware-
house location and goods information, locks the warehouse receipts, and activates
the alarm system. As long as the warehouse receipts are locked, any unauthorized
operation will automatically generate an alarm and alert the warehouse manager
directly in the background. This to some extent brings the incoming movable assets
relevant properties of “immovable property” and reduces the probability of common
problems in warehouse receipts pledge, such as fraudulent, substandard, and repeated
mortgages.
Chapter 8
Future of Credit Empowerment
8.1 Summary
As the competition of enterprises increasingly evolves towards the competition

among supply chains, becoming a great enterprise also increasingly requires having
a great matching supply chain system. At Jingdong Y Open Day 2019, Professor
Li Xiaoliang, the father of modern supply chains, founder of the Stanford Global
Supply Chain Management Forum and a member of the National Academy of Engi-
neering, said, “The best supply chains are not only fast and optimally cost-effective,
but they are agile, adaptable, and guarantee the interests of partners, which will be a
standard configuration for world-class enterprises.” Like the criteria of great enter-
prises, great supply chains must be able to continuously create value and guarantee
the interests of the partners in the chain. SMEs with many partners are an important
part of each supply chain, and their good operation is a prerequisite for the supply
chain to create value. However, most SMEs are still suffering from the problem of
difficult and expensive financing, and there is a trend of further deterioration.
Helping SMEs in the supply chain to obtain financial resources is a responsi-
bility that all parties concerned must assume. Among many attempts to solve the
problem, supply chain finance has become one of the effective solutions. Core
enterprises, financial institutions, supply chain service enterprises and financial
technology companies have collaborated from different perspectives to build the
ecosystem of supply chain finance. The supply chain finance solution needs to be
able to discover the credit of SMEs and transfer the credit of SMEs to financiers to
obtain financial resources, which requires credit intermediaries with corresponding
technological capabilities to transform the information of SMEs into credit and credit
into financial resources, helping to complete the process of credit identification, credit
creation, credit transfer, credit transformation and value creation. According to which
party in the supply chain finance ecosystem is responsible for the credit intermediary
function, there are four supply chain finance models, among which the model with
three functions of core enterprises, financial institutions and credit intermediaries

https://doi.org/10.1007/978-981-19-3513-8_8
174 8 Future of Credit Empowerment
integrated in one is a feasible path for large groups to combine industry and finance
and become world-class great enterprises.
In an economic system with Chinese characteristics, state-owned enterprises play
a backbone role and are also often the chain-owning enterprises in the supply chain,
undertaking the historical mission of becoming great enterprises that must solve the
plight of SOEs in their own industrial chain and supply chain. Through the path
of a model that unites the three functions of core enterprises, financial institutions
and credit intermediaries, gradually realizing the integration of industry and finance
and continuously strengthening their own financial capabilities and internal finan-
cial levels is a clear path to greatness in the future. The path is divided into three
stages: exogenous finance, finance company finance and industrial bank finance, and
industrial bank finance can completely serve the financial needs of the group and
the supply chain itself, which is a perfect combination of industry and finance. The
starting point of the great path has to start from solving the capital dilemma of the
peripheral enterprises in the supply chain, and the digital debt certificate is a specific
tool to solve this problem.
The construction of digital claim credentials relies on two foundations: The first
is iABCDE Integrated intelligent technical basis, especially with block-chain tech-
nology as the core foundation; the second is the legal basis to support the protection
of the splitting and transfer of claims. The emergence of digital claim credential prod-
ucts built on the basis of both that can be freely split and transferred at multiple levels
has become possible, and a number of market pioneers have started their own prac-
tice. The development and market value of the solution are illustrated by the afore-
mentioned cases of Zhongjin Cloud X Credit, CSCC Cloud Credit, Ouyeel Cloud
E-commerce’s Tongbao and Shanghai Huaneng E-commerce’s Huaneng Credit.
Based on the market value that has been revealed, enterprises can introduce this
supply chain financial tool into their own supply chain system. However, as an inno-
vation, it has certain rules for its development, and the introduction process of the
enterprise must have a scientific approach. According to the diffusion of innovation
theory, which explains the process of adopting innovation by people and organiza-
tions, the adoption model of supply chain finance solution can be constructed. Enter-
prises that want to introduce supply chain finance innovations should first advocate
the innovation matters, and only after there is sufficient awareness and consensus
can they proceed with the implementation, and the advocacy phase requires sequen-
tial scheduling and matching of solutions and issues. In the implementation stage,
enterprises need to redefine their own supply chain finance solutions and implement
the restructuring of enterprise and supply chain structures to suit their own solu-
tions, then continuously disseminate and clarify the supply chain finance solutions
in their own supply chain system, and finally regularize the supply chain innova-
tion as part of the supply chain business. The cases of five companies, including
Sinopec EPEC, provide experiences of introducing supply chain finance innovation
in structural reform.
The important issue that must be focused on after the introduction of supply chain
finance solutions is the risk management of supply chain finance, especially, since
innovative matters harbor greater uncertainty, risk management becomes even more
8.2 Future Prospect 175
important. Firstly, it is important to be able to depict the supply chain risks faced by
supply chain finance, including endogenous and exogenous risks. Next, following
the steps of spotting threats, assessing possible harm to oneself, identifying risks,
determining response methods, and prioritizing methods, the risk management tools
of risk avoidance, risk mitigation, risk sharing, and risk acceptance are used wisely
to deal with supply chain finance risks.
8.2 Future Prospect
At Jingdong Y Open Day 2019, Professor Li Xiaoliang, the father of modern supply
chains, founder of the Stanford Global Supply Chain Management Forum and a
member of the National Academy of Engineering, said, at present, business faces
three major challenges: the increase of uncertainty and the acceleration of change; the
changing technological and political and economic environment; and the increasing
number of partners with different interests. This is also the challenge that supply
chain finance will face.
8.2.1 Future Development Trends of Supply Chain Finance
The future of supply chain finance presents four main trends: technologization, capi-
talization, verticalization, and ecologization. Each trend has significant features and
will become a vein for the development of supply chain finance.
Technologization: technology is the accelerator of supply chain finance upgrade.
With the continuous evolution of Findustrial Tech, the penetration of technology
in all aspects of the industrial chain is obvious, which accelerates the upgrading of
industry and finance, drives the formation of a new pattern of supply chain finance,
and helps the transformation of supply chain finance in customer identification,
product services, partners and channel models.
Fintech brings unprecedented opportunities for the reconfiguration and upgrading
of the entire supply chain. Industry empowerment and data penetration (such as data
information, business information, scenario information, etc.) by means of financial
technology make the product service more intelligent, scenario combination more
closely, and data value more prominent, constantly giveing birth to new products,
new business formats and new modes, and providing a constant source of innovative
vitality for financial development.
Capitalization: capital becomes the link between industry and finance.
In supply chain finance, capital is not only a means to make profit, but also helps
supply chain finance companies form a relationship with their partners to achieve
overall common development and value appreciation under the goal of win–win.
Verticalization: vertical operation shapes the competitiveness of supply chain.
176 8 Future of Credit Empowerment
With the increasingly fierce competition in the market, the verticalization of

industrial division of labor and industry segmentation has emerged, and we have
summarized the vertical expansion mode of different financial institutions and
internet fintech platforms. Through the vertical expansion of the supply chain
market segment, longitudinal excavation of the industry and analysis of examples
covering surrounding areas, financial service institutions can make use of their own
endowments and capabilities, base on vertical fields, accurately identify segmented
market customers, meet the financial needs of upstream and downstream enterprise
customers by relying on the supply chain, maximize the geopolitical advantages to
cover surrounding consumers and provide comprehensive and specialized services.
Ecologization: building ecology is the main theme of supply chain finance.
Supply chain and financial groups carry out financial business to support upstream
and downstream of the supply chain through their own strength, or build a scenario-
based ecosphere with their own ability, and help the supply chain ecology to
jointly improve hard strength, proceed with overall ecological transformation and
benefit financial business in return through reasonable capital gain and thorough
understanding of business under the premise of reasonable risk control.
8.2.2 Road to Greatness for Conglomerates
The road to greatness for conglomerates ultimately requires the construction of a great
supply chain, industrial ecology and a perfect combination of industry, finance and
commerce, to ultimately create value continuously. To achieve this step, the industrial
bank, an internal financial system that fully meets the needs of its own industry,
is needed, and the premise of the structure is to form upstream and downstream
relationships that are predicated on industrial ecology and long-term cooperation in
the supply chain in the achievement of perfect collaboration within its own industrial
system.
This requires the transformation of the structure of the conglomerate from pyra-
midal to flat, the formation of equal combos of the conglomerate, the conversion
from the role of a leader to an organizer, the integration of business companies,
manufacturing enterprises and financial institutions in its own system into a ring
structure with capital as the link, and the bundling of important enterprises in the
industrial chain into the group’s integrated industrial chain through investment to
form a “whole industrial chain” layout that penetrates all aspects (Fig. 8.1).
However, all these efforts are aimed solving the problem of difficult and expensive
financing for SOEs in the supply chain link, and realizing the unhindered flow of
capital in the supply chain. We find that the digital claim credential instrument secured
by intelligent technology realizes the transmission and sharing of credit without loss,
and this supply chain finance model becomes the first step towards the greatness of
the supply chain.
8.2 Future Prospect 177
Commercial
Enterprises
Groups
Manufacturing Industrial
enterprisese banks
Fig. 8.1 Whole industry chain layout of conglomerates
Further innovations in both technology and regulation can be anticipated in the

future, and the conditions for enterprises to move towards greatness are becoming
more and more ripe. No one can guarantee that future success will come, but as is
famously said: we are not waiting for the future, we are creating it.
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Supply Chain Finance

Supply Chain Finance

ISBN 978-981-19-3512-1 ISBN 978-981-19-3513-8 (eBook)

Jointly published with China Machine Press

© China Machine Press 2022

The competition in the twenty-first century is no longer the competition between

Beijing, China Xuefeng Sun

Beijing, China Xuefeng Sun

1 Background of Supply Chain Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2.2.4 Capabilities Required for Credit Empowerment . . . . . . . . . . 44

4 Technical and Legal Foundation of Digital Debt Instruments . . . . . . . 83

6 Introduction of Supply Chain Finance Solutions . . . . . . . . . . . . . . . . . . . 129

© China Machine Press 2022 1

1.1 Great Enterprises Have Great Supply Chains

1.1.1 What is a Great Enterprise?

According to Professor Liu Qiao, Dean of the Guanghua School of Management at

1.1.2 What is a Good Supply Chain?

Table 1.1 Top 25 global

1.1.3 Great Enterprises Create Value for Other Companies

1.2 Challenges for Great Supply Chain—Difficult

1.2.1 Definition of SMEs

Table 1.2 Share of revenue

Table 1.2 (continued)

1.2.2 Prominent Role of SMEs in National Economy

Table 1.3 (continued)

Fig. 1.1 Proportion of Large-scale

Main business income (trillion yuan) Year-on-year growth rate (%)

1 4.3% 4.2% 4.0%

Total profit (yuan) Year-on-year growth rate (%)

1.2.3 Financing Situation of SMEs is Not Optimistic

Table 1.4 Composition of social financing costs in China

1.2.4 Increasing Difficulties in Financing SMEs Globally

According to a report by the Global Supply Chain Finance Forum (GSCFF,2015),

1.3 Feasible Solution—Supply Chain Finance

1.3.1 Background of Development of Supply Chain Finance

management as the most important core competitiveness of enterprises, and only on

1.3.2 Development Environment of Supply Chain Finance

Table 1.5 Summary of China’s supply chain finance policies

Table 1.5 (continued)

Although the total financial supply is abundant, there is an internal structural

the level of popular application in terms of technical reliability, business benefit

1.3.3 Connotation of Supply Chain Finance

Supply Chain Management

Supply Chain Finance

Fig. 1.6 Supply chain finance methods. Source Hofmann (2005)

1.3.4 Development History of Supply Chain Finance

Table 1.6 Development stages of supply chain finance

1.3.5 Market Prospects of Supply Chain Finance

2.1 Supply Chain Finance Ecosystem

2.1.1 Panorama of Supply Chain Finance Ecosystem

© China Machine Press 2022 29

At present, China supply chain finance has developed to a platform-based stage.

2.1.2 Deconstruction of Capability of Supply Chain Finance

(5) Premise of technological advancement. The platform-based development of

Basic Function Layer

(1) Industry scenario deconstruction capability

(2) Business digitization capability

(3) Data cleaning and integration capability

(4) Technical security capability

layer need to achieve a balance of reliability, openness and standardization in terms

Business Service Layer

(1) Solution design capability

Platform-based Supporting Infrastructure

2.1.3 Analysis of Types of Supply Chain Finance Platform