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How technology is opening the Chinese supply chain to the world

Blog By Duncan Khoury – 18 July 2016

China has a long history as one of Australia’s largest trade partners, worth more than $150 billion or around 23 per cent of Australia’s trade. However, if one simply look at Australian small to medium enterprise import volume out of China the percentage would be significantly higher. Accessing the Chinese market is a sought-after advantage for any business looking to achieve success on a global scale, when it comes to both procuring and selling products.

However, cracking the Chinese market has been an issue for all for all business including the big end of town. Thanks largely to China’s unique regulatory system, Chinese and foreign smaller businesses are often required to jump through hoops to work together, let alone secure the backing of the big Chinese banks for any financing required. Until recently, transacting with China’s supply chain was a manual process, requiring high levels of involvement from both Chinese and foreign banks, along with faxes, emails and a general lack of transparency. This slowed the process down to a near standstill, making it time consuming, confusing and costly for small to medium foreign businesses to operate within the local market

Recent advances in technology have started to open up the Chinese supply chain to the world. Some nonbank financial Institutions are digitising not only the management of the supply chain process, but also introducing a digital wallet through internet platforms which remove the reliance on the banks for smaller businesses.

However, the biggest change in this space has been the burgeoning but increasing research and development of blockchain technology by the financial institution sector particularly around supply chain management and financing. Known largely for its use in the bitcoin currency, blockchain is a secure, distributed ledger comprising data blocks shared by all users in a continually evolving system. For financial organisations, a blockchain allows for increased security, greater market insight and increased transparency and compliance. In the trade finance space, this means importers, exporters, government agencies, shipping companies, transport operators and insurers would form part of this change. Blockchain could be used to digitise sales and other legal contracts, allow the location of goods to be monitored and facilitate payments in close to real time.

The potential for widespread adoption in China could have remarkable effects on the supply chain.

For one, blockchain’s increased security grants buyers, sellers and financial institutions alike peace of mind when it comes to large digital financial transactions. In a market moving towards digitalisation, cyber security remains a primary concern for all supply chain executives worried about building more robust supply chain resiliency. Blockchain could add another layer of security to transactions. Unlike a bank’s ledger, which is centralised, blockchain is widely distributed. Due to this decentralisation, data resides everywhere. This creates a system with no single access point that could allow hackers entry to exploit the entire system, making blockchain nearly impervious to hackers.

Chinese manufacturers and financial institutions can take advantage of the complete transparency blockchain could offer. Users within the blockchain system would be able to view a full history of all transactions ever made, tracking goods back through their production history. In an era where more and more businesses are concerned with sourcing their goods ethically and sustainably, a full history of where the product was sourced and how much was paid is extremely advantageous.

Blockchain would allow foreign businesses to avoid unfortunate and costly surprises when dealing with Chinese suppliers. It would also hold Chinese manufacturers to a higher standard of compliance. Any changes made within the blockchain require the consensus approval of the other users, making fraud a far less likely occurrence.

China has been slow to join the blockchain movement, due largely to regulatory constraints and a hesitation to adopt a decentralised system. There is movement in this space, however, with the Chinese government recently announcing the Chinaledger Alliance, although this is not trade finance focused. This project will work towards incorporating blockchain technology into ‘Internet of Everything’ applications, though there has yet to be any public involvement from Chinese financial institutions.

Blockchain technology could be the future of supply chain financing. As the world is granted more open access to the Chinese supply chain, the additional transparency and security offered by blockchain could be invaluable.