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[Belt and Road Financial Cooperation Practice Case] GF Securities: Assisting the Belt and Road Development of Enterprises through Overseas Hedging
Editor's note: In order to systematically study the financial cooperation practice of the BRI, promote experience exchanges and business cooperation in the financial sector, and better introduce the excellent cases of financial cooperation, Asian Financial Cooperation Association (AFCA), on the basis of Belt and Road Financial Cooperation Committee (BRFCC), conducts Asian Financial Cooperation Association Belt and Road Financial Cooperation Practice Report. The appendix of the report selects 40 Belt and Road Financial Cooperation Practice Cases, including credit support, equity financing, bond issuance, insurance services, payment and settlement, risk management, inclusive finance, investment and financing platform, and epidemic prevention and control. The rich cases not only show the business achievements of AFCA members and relevant institutions under the BRI framework in recent years, but also reflect the new changes of the BRI financial cooperation practice.
GF Securities: Assisting the Belt and Road Development
of Enterprises through Overseas Hedging[1]
Abstract: Hedging through futures can help real
enterprises participating in the Belt and Road projects to hedge the systemic
risks caused by fluctuations in international commodity markets. Through joints
efforts of Hong Kong and UK subsidiaries, GF Futures, a wholly-owned subsidiary
of GF Securities, has established a 24-hour trading platform covering all major
global commodity exchanges for its clients, both domestically and
internationally. By timely responding to the client’s urgent needs, utilizing
domestic and overseas resources and efficient internal operations, GF Futures
recommended a domestic steel mill client to use the iron ore contract of the
Singapore Exchange, so that it successfully hedged the iron ore raw materials
purchased overseas by the client in a timely manner and helped the client avoid
the market risk, which strongly protected the Belt and Road project that the
client participates in.
I．Analysis
of Financial Demands
Hedging
through futures can help real enterprises participating in the Belt and Road
projects to hedge the systemic risks caused by fluctuations in international
commodity markets. Since many of raw materials in China still need to be
imported and domestic futures contracts are not effective in hedging overseas
purchases due to issues such as time differences and contract settings.
Therefore, relevant financial institutions need to provide specialized guidance
to their clients and recommend appropriate financial derivatives for hedging to
real enterprises based on their actual situations. However, the capital
strength of overseas entities participating in hedging is often far away from
their domestic parent companies. Therefore, when paying for overseas margin
calls, cross-border transfers from the domestic parent companies are often
required. But it is difficult to transfer the capital in place at the first
time due to foreign exchange control and other factors. In this regard, the UK
subsidiary of GF Futures takes advantage of its reputation to provide credit
lines to the overseas subsidiaries of its outstanding industrial clients, which
greatly simplifies the process of cross-border hedging for clients, and greatly
improves the efficiency of overseas capital uses for enterprises related to the
Belt and Road. If clients choose an overseas futures product for hedging and
need credit from the UK subsidiary of GF Futures, they generally need to go
through a long process of account opening and credit review, which usually
takes two to three months because of the different standards and processes for
account opening in China and abroad. Putting clients above everything else, GF
Futures provides efficient cross-border commodity services to them, and puts
the purpose of serving the real economy into practice.
II．Background
This
domestic steel mill company is one of the largest private steel mills in China,
and its steel products are widely used in Belt and Road projects related to
water conservancy, highway and railroad construction, high-rise buildings, and
machinery manufacturing, etc. At the beginning of 2018, the company wanted to
hedge its iron ore purchased abroad, but did not know much about iron ore
futures. It received an order and purchased 200,000 tons of iron ore according
to its production plan. There was an urgent need for hedging, but there was not
enough time for market research for any trading strategies.
III.
Measures and Highlights
i. Upholding the client-centric principle and fully
understanding client needs
Knowing
exactly what the client needed, the overseas business staff of GF
Futures
believed that the iron ore swaps in Singapore could best meet this company’s
hedging needs and could hedge the adverse impact on the company’s operations
due to commodity price fluctuations. On the other hand, the company’s overseas
funds were already occupied so that it needed the overseas platform of GF
Futures to provide credit in order to complete the relevant trading at the
first time.
ii. Sensing the urgent needs of
clients and fully protecting their interests
While
preparing the documents for account opening, the overseas team of GF Futures
did credit background investigation on this client at the first time. Team
members worked overtime and completed the work in one week which normally took
two months. Considering the excellent qualification of the domestic main body
of the company and the fact that the construction materials produced by the
company are widely used in the Belt and Road projects, the UK subsidiary of GF
Futures granted it a full credit after comprehensive evaluation, which solved
the temporary shortage of funds for its overseas platform. With the
professional recommendation from overseas business team of GF Futures, this
company immediately decided to hedge the 200,000 tons of iron ore
purchased overseas through the iron ore contract of Singapore Exchange.
IV.
Achievements and Impacts
i. Client interests are fully
protected through the appropriate utilization of hedging
The
client hedged the entire iron ore of approximately 200,000 tons the day after
the account was successfully opened, essentially hedging the price risk
throughout the production process. The price of iron ore fluctuated sharply
soon afterwards, with a price drop of nearly 20
percent in
the following month. If the client had not hedged in the first place, the loss
on the production side would be significant. With the professional and timely
service from the relevant team of GF Futures, the company appropriately
utilized the financial derivatives to avoid the potential market risk
successfully and protect its normal production and operation activities
effectively. The steel produced by this company also provided a strong
guarantee for the Belt and Road infrastructure projects.
ii. The domestic and overseas
integrated service capability of GF Futures has been strengthened
With
the accelerated bidirectional opening up of the capital market, futures
industry in China has speeded up its pace in internationalization, bringing new
opportunities for development of futures companies. GF Futures actively
provides domestic and overseas derivatives and commodity trading services to
clients by integrating domestic and overseas services, expanding business
platforms, exploring major international exchange licenses, and developing
international trading capabilities. By continuously assisting clients to manage
the risks of business and projects of regions related to the Belt and Road, GF
Futures also witnessed improvement in integrated domestic and overseas services
capabilities and international competitiveness.
V.
Difficulties, Experience Summary and Policy Recommendations
As
Chinese enterprises continuously go global, they will inevitably face risks
brought by market price fluctuations such as exchange rates, interest rates,
and commodity prices in the course of trade and investment in regions related
to the BRI. The volatility in macro economy and financial markets can also
increase the risk of commodity price fluctuations, which can greatly affect a
large number of Chinese enterprises involved the Belt and Road infrastructure
projects. As a result, Chinese enterprises are in an increasing need for
professional capabilities of futures firms in derivatives trading to help
manage risk.
i. Selecting proper overseas
derivatives for hedging
Enterprises participating in the Belt and Road projects need
to choose appropriate products when choosing overseas derivatives contracts for
hedging. In the past few years, there has been continuous negative news about
investment losses of Chinese-funded enterprises which are caused by improper
selection of overseas derivatives. On the one hand, it should be noticed that
clients of Chinese-funded industry are mainly focused on hedging, and losses at
the futures level do not represent the loss of the entire group. On the other
hand, it is critical to select proper overseas derivatives. There are many
types of overseas derivatives which have different requirements for margin,
leverage ratio and so on. Therefore, based on their own conditions, enterprises
should choose suitable derivatives for hedging that they are familiar with.
ii. Selecting suitable overseas
brokers to assist in risk management
Enterprises participating in the Belt and Road projects need to select brokers who are familiar with them to conduct trading. Many industrial clients from Chinese-funded enterprises are well-known in China, but their creditworthiness in the international market does not yet match their true strength. At the account opening stage, industrial clients of Chinese-funded enterprises often encounter various adverse effects caused by credit rating and other factors. At the trading stage, many of them also have difficulties in getting ideal services and communication. When market volatility has increased significantly, foreign brokers do not have mature methods for credit checking and risk management because they have not yet fully entered the domestic financial market. Therefore, compared with foreign institutions, brokers with Chinese background are more competitive in serving clients of Chinese enterprises. Certainly, this also requires Chinese brokers to improve their capabilities for cross-border comprehensive service and continuously strengthen their international service capabilities.