China should set up a specific State-run fund dealing with trade finance in order to beat decreasing trade volumes, which have been hit hard by the global financial crisis, a senior executive of the Asian Development Bank (ADB) said.

Zhao Xiaoyu, vice-president of the ADB, suggested that China set up a "trade finance fund" that could cooperate with multilateral financial institutions to finance companies in the imports and exports business during an interview with China Daily last week.

"If a State-run fund is set up, it may cooperate with multinational financial institutions, including the ADB, to jointly provide guarantees for trading firms in applying for loans from banks," Zhao said.

"With the guarantee from these institutions, companies will have easier access to credit," he said. But he did not elaborate on how the money for the fund would be raised.

The worldwide financial downturn has caused a dramatic reduction in the availability of trade financing, exacerbating an already dire global economic situation, said Zhao.

The shortage of trade financing has hit developing nations particularly hard as many major international banks focus on rebuilding their capital and reducing risk.

"The governments and regional institutions should play a role in promoting international trade. The fund may be limited in scale, but it would send a positive signal to the market and help in regaining confidence," Zhao said.

The idea is based on ADB's own practice on trade finance, according to Zhao, who worked as the deputy governor of the Export-Import Bank of China before he took charge at the ADB.

The ADB has had a trade finance program since 2004. The Trade Finance Facilitated Program (TFFP), with initial capital of $150 million, has been providing finance and guarantees through international and local banks to boost trade in developing nations.

ADB announced on April 1 that it would expand the TFFP to $1 billion, a move that could generate up to $15 billion in much-needed trade support by the end of 2013, according to Zhao.

ADB has also increased the maximum maturity of loans permitted under the TFFP to three years from the earlier two years.

"One dollar of TFFP exposure can attract a similar amount of private sector financing. This, plus the fact that the portfolio can roll over twice a year, means that the $1 billion program can equal as much as $3 billion in support for trade every year," he said.

ADB expects the program to be used more widely in countries where it is already active and to be used in at least three more countries by the end of this year.

Currently, 72 international banks and 60 local banks are participating in the program. ADB expects the number of participating local banks to rise to 100 by the end of the year. "Some banking institutions from China have expressed their willingness to participate in the program," said Zhao.

(China Daily April 7, 2009)