The provincial capital is not often thought of as a financial center. It doesn’t have a stock exchange of its own, and financial services comprise less than one-tenth of GDP. This contrasts with Hong Kong and Shenzhen, where financial services contribute roughly twice as much (19%-20%) to GDP. Guangzhou, instead, has traditionally been known as an industrial powerhouse, dominated by state-owned enterprises in heavy industries and SMEs in export-oriented manufacturing.
Yet Guangzhou’s ambitions for developing financial services should not be underestimated. This is especially as the Nansha special economic zone is built out in the coming years (see our primer on Nansha, and its World Financial Island in Hengli). That is where a GBA International Bank is being built, and where a new Futures Exchange will be launched, initially trading carbon credits.
Indeed, Guangzhou is showing that a city doesn’t need to have a stock exchange to make its financial sector go. And with the rise of fintech, it remains to be seen how the entire industry will be shaken up to the point where traditional financial institutions and trading platforms will matter less than they do now.
It’s not as if Guangzhou’s finance sector is a slouch, either. In the first three quarters of this year, it generated RMB 161.953 billion of revenues, up 7.8% YoY. Finance now accounts for 9.1% of the city’s GDP, and contributed 0.7 percentage points to overall growth in the first three quarters. Tax revenues grew more slowly (+2.6%), but this was unsurprising, as the city government has been giving out tax cuts and rebates to everyone this year to cushion the slowing economy. Nevertheless, financial institutions still chipped in RMB 24.24 billion, or 7.96% of the government’s total tax intake.
Banking institutions remain the sector’s main players, and on face value, they appear to be in good health. Their overall non-performing loan ratio stood at just 0.9% – around 0.04 percentage points lower than last year. Yet they are growing fast. As of the end of September, the balance of deposits and loans of local and foreign currency in Guangzhou was RMB 10.22 trillion, up 12.6% YoY. This growth rate was the highest of the four Tier-1 cities (beating Beijing, Shanghai and Shenzhen), and was above the provincial average (12.0%).
Driving this momentum, according to local media, is not only traditional manufacturing industries, but also emerging sectors such as scientific research and technology-related industries. And yes, loan growth is accelerating among SMEs, not just the big state-owned enterprises. The balance of SME enterprise loans in the city at the end of September was RMB 563.82 billion yuan, up 9.8% YoY.
As for equity markets, Guangzhou might be having to send their best companies to list elsewhere, but there is no shortage of them: 174 Guangzhou-based companies are listed in Shenzhen, Shanghai, Hong Kong or overseas, with 14 making their debut this year. (That compares to 293 listed companies based in Shenzhen.) Meanwhile, eight of the city’s most promising young tech companies have been accepted onto the new STAR Market in Shanghai since its opening earlier this year. And at the SME level, 493 companies are registered on the nationwide OTC market, including seven new ones this year. Total equity raised this year amounted to RMB 338.571 billion. This was less than the RMB raised in corporate bonds, at RMB 734.384 billion.
Outpacing all of that is the insurance industry. From January to September, premium income generated by insurance firms operating here was RMB 109.05 billion, up 20% YoY, accounting for around one-fourth of the province’s total. That brought the industry’s total assets to RMB 432.425 billion, up 12.83% YoY. This not purely due to population size, as Guangzhou accounts for only one-sixth of the province’s total registered population.
Now, for the next big thing …
The outlook for Guangzhou’s finance industry is even more positive. This is because of some major changes under way in the province’s finance sector, which are being driven by the capital city’s government. The focus is on so-called “supply chain finance”, in which technologies such as blockchain are being put to effective use to grow credit for smaller suppliers within larger industrial groups. It was explained at a recent symposium in Guangzhou by a provincial official – in a speech that was overshadowed by reaction to his comments about Macau’s plans for a new RMB-denominated offshore market.
Basically, this drive is all about getting credit to companies that need it the most: SMEs. Too often, these companies struggle to get lines of credit from state-owned banks because their small scale means they carry a riskier credit profile, and they don’t have enough physical assets to use as collateral. Blockchain technology can help, in two ways: one, it can effectively secure intellectual property by registering owner rights in a way that can be protected more forcefully. (Which is why Guangzhou also has an “Internet Court.”) And two, blockchains can provide greater security to SMEs in ensuring their contracts are honored by their upstream and downstream partners.
Guangzhou is the perfect city in which to roll out reforms in this space. It has tens of thousands of fully formed value chains: companies based here that do everything within an industry, from design to manufacturing to distribution.
The city plans this year to establish a Guangzhou Supply Chain Financial Service Center and a Supply Chain Finance Association. The next step will be to set up a “Guangzhou Supply Chain Financial Service Base”, which would serve SMEs in the upstream and downstream of various industries. Their initial focus will be on companies involved in emerging strategic industries, such as smart manufacturing, biomedicine, trade logistics, and modern agriculture, developing standards in information collection, data interface and integration of data resources.
This project is wide-ranging in the scope of its ambitions. It will shake up not only the traditional finance industry, but also the legal profession, and so its progress will be both closely watched and strongly supported from above. The growth of supply chain finance will both feed into and drive the development of the Guangzhou Internet Court (see our report) and the Guangzhou Arbitration Institute. They will play a key role to resolve disputes online, quickly, in batches, and intelligently.
Imagine a day in the not-too-distant future when disputes are resolved entirely within a blockchain; when agreements are set in motion the moment negotiations are concluded, and cannot be altered at the whim of one party. That is the future envisaged by Guangzhou. And it is a future in which finance will play a key role, spurring economic activity and strengthening companies at every level of industrial chains.
What would that mean for the role played by current key participants in the finance industry? Would venture capitalists, investment bankers, and fund managers still interact the way they do now? What about lawyers? Blockchain has the potential to change all of this. And Guangzhou will be at the forefront of this change.
There is little doubt about the priority of this project, especially since President Xi Jinping announced recently that he wanted to see progress in blockchain technology development speeded up.
How fast will it all happen? That is an important question. We will have more updates on this in the near future. Stay tuned.