STUDY ON DEVELOPING WAREHOUSE RECEIPT
HYPOTHECATION FINANCING METHOD IN CHINA
Xiao Xiang, Xue Shengjie, Yang Chengcheng and Zhao Zheng
School of Economics and Management, Beijing Jiaotong University, Beijing, P.R. China
Keywords: Logistics Financing, Warehouse Receipt, Hypothecation, SME.
Abstract: Small and Medium-sized Enterprises (SME) play an important role in the development of national
economy, but financing difficulty has always been one of the major obstacles in their development. How to
broaden financing channels and innovate upon financing methods are problems need urgent resolve.
Logistics and finance is combined to logistics finance, and warehouse receipt hypothecation financing
method starts an effective approach for providing cash flow to SME. The paper give an instruction to
concept and operation flow of warehouse receipt hypothecation, and analyze it’s operation mode and
benefits, in the same time ,analyze it’s risks control, furthermore ,the paper put forward some suggestions
for developing it in China.
1 CONCEPTS AND LITERATURE
REVIEW
1.1 Concept of Logistics Finance
Logistics finance is the logistics-oriented operation,
by developing, providing and applying various
financial products and services it organizes and
adjust the movement of capital and credit in the field
of logistics effectively, so as to achieve organic
unity of information flow, logistics and cash flow.
Judging from the enterprise practice in recent years,
developing logistics finance business is of great
importance and significance to the sustainable
development of entire national economy. As to
logistics enterprises, logistics finance can improve
the integrated service level of enterprises, strengthen
the competitive ability of enterprises, enlarge the
business scale of enterprises, add service function of
high added value and extend the operational profit of
enterprises; for supply chain enterprises, logistics
finance can reduce financing cost of enterprises,
broaden financing channels of enterprises, decrease
the capital occupancy rate of raw materials, semi-
manufactured goods and products of enterprises,
improve the capital utilization ratio of enterprises,
and realize optimized configuration of the capital;
cut down the purchasing cost or enlarge sales scale,
improve the sales profit of enterprises; for financial
institution, logistics financing service can help the
financial institution to enlarge loan scale and
decrease credit risk.
1.2 Concept and Standard Operation
Flow of Warehouse Receipt
Hypothecation
The so-called warehouse receipt hypothecation
means the enterprise stores its goods in the storage,
then applies for loans from banks with the product
warehousing certificate issued by the warehouse -
warehouse receipt, and the bank will provide a
certain proportion of loans in accordance with the
value of the goods, at the same time, the warehouse
supervises the goods for the bank and collects
certain payment. The flow chart of warehouse
receipt hypothecation business can be expressed as
in Fig. 1.
Loan
Ente rpri se
Bank
Stora ge
Enterprise
Warehouse R eceipt
Stored Goods
S torage A greement
Supervise
Hypothecated
Products for
the Bank
Issue L oan
A pply for Loan Verify
Guarantee Letter of
Irrevocably Assisting
the Bank to Perform
Hypothecation Right
Figure 1: Flow chart of warehouse receipt hypothecation
operation.
295
Xiang X., Shengjie X., Chengcheng Y. and Zheng Z..
STUDY ON DEVELOPING WAREHOUSE RECEIPT HYPOTHECATION FINANCING METHOD IN CHINA.
DOI: 10.5220/0003547202950300
In Proceedings of the 13th International Conference on Enterprise Information Systems (ICEIS-2011), pages 295-300
ISBN: 978-989-8425-53-9
Copyright
c
 2011 SCITEPRESS (Science and Technology Publications, Lda.)

Generally, the process of warehouse receipt
hypothecation business includes six steps:
 The loan enterprise stores goods in the
warehouse enterprise;
 The warehouse enterprise issues certificate of
stored goods to the loan enterprise -
warehouse receipt;
 The loan enterprise puts forward mortgage
loan application to the bank with warehouse
receipt;
 The bank verifies the contents of the
warehouse receipt of the warehouse
enterprise;
 The bank provides loan to the loan enterprises
and consigns the warehouse enterprise to
supervise the goods;
 The monitoring and disposal of the goods.
The data reveal that the new business of logistics
finance based on warehouse receipt hypothecation
has boomed in China. In 2005, the line of credit of
Chinese Material Storage and Transportation
Company has surpassed two billion Yuan already,
which was twice of that in 2004. And it’s still has a
stable increasing recently years. This good
momentum of development precisely proves the
financial product extended from logistics has not
only withstood the market test, but also is
developing and strengthening.
Most importantly, the warehouse receipt
hypothecation financing business transforms the
static storage into negotiable funds, promoting
virtuous circle of economy and improving
operational efficiency of economy, which is
conducive to build a financial tie between banks and
enterprises and dredge fund raising channels for
enterprises. This innovation in financial business
further promotes the logistics industry towards
diversified, comprehensive and individual
development, promoting not only the modernization
process of logistics industry, but also the financing
mode innovation of SME.
1.3 Literature Review
At the international level, the theoretical research of
logistics financial service has tended to be mature.
Europe, United States and other countries has got
clear legislation on warehouse receipt hypothecation
already. As to industry environment, as early as the
beginning of the 20th century, United States enacted
unified bill of warehouse receipt, ensured the
standard of warehouse receipt, established socialized
warehouse receipt system and enhanced the
negotiability of the stored goods. The number one
profit source of the world's largest shipping
company Maersk and the world's largest express
logistics company UPS is from logistics financial
service.
Wei S U N (2004) studied credit contract based
on Stiglitz, Weiss model. Starting from the basic
assumption of information asymmetric, he
researched the balance and economic efficiency of
the credit market. As to the study of credit contract
design mechanism, there are two major categories,
one is the signal model based on Spence (Stiglitz
and Weiss, 1981), the other is the screening model
based on Rothchild-Stiglitz (Spence, 1973), and the
latter has very wide application in the credit contract
design in hypothecated loan market (RothchildM,
StiglitzJ, 1976; Yang, 1992; Brueckner, Borrower
mobility, 1992; Brueckner Borrower mobility,
1994).
Logistics finance started relatively late in China,
since 1991 Chinese Material Storage and
Transportation Company has begun to study this
business, but at that time banks were still under
planned economic system in China and banks did
not enter modern commercial operation mode fully,
so it was until 1999 that Chinese Materials Storage
and Transportation Company first started logistics
financial operation business. Up to now, with the
development of logistics financial business, Chinese
Materials Storage and Transportation Company has
completed hypothecated loan as high as 11.1 billion
Yuan.
Wang Dan and Gao Dali (2006) studied modern
logistics facing innovation in financial services, and
they proposed the innovative mode of the third-party
logistics service to promote hypothecated loan and
the development of SME as well as the business
mode of SME financing in the supply chain system.
Of course, compared with foreign countries,
domestic theoretical research still lags behind, the
theory system construction of logistics financial
needs further unified thought. Therefore, its
operational mode, risk management and risk control
should be analyzed.
2 OPERATION MODE AND
BENEFIT OF WAREHOUSE
RECEIPT HYPOTHECATION
Warehouse receipt hypothecation is an innovative
service combining finance with logistics which is
provided by the third-party logistics enterprise, and
its basic operational principles are: the
manufacturing enterprise is the capital demander and
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Table 1: Comparison between warehouse receipt hypothecation loan and conventional loan business.
Comparison items Warehouse receipt hypothecation loan business Conventional loan business
Judging criteria Credit record, trade background, trade rivals Enterprise scale, asset-liability ratio, capacity
to make profit
Source of repayment Enterprise sales income or future cash flow derived from
trade
Sales income, profit, new debt
Control process Storage and trading process Pay attention to the full process of manufacture
and operation
The third party By means of the professional advantage of the third party Seldom by means of the third party
Guarantee method Self reduce and keep away risks, and also ask related
parties for joint guarantee
Rigidly examine subject qualification before
loan, basically with guarantee
pledge provider, the third-party logistics enterprise is
the provider of financing warehouse service, the
bank is the provider of credit loan, and three parties
sign a cooperation agreement called "warehouse
receipt hypothecation". The manufacturing
enterprise makes the procured raw materials or
finished products to be sold as pledge to enter the
financing warehouse set up by the third-party
logistics enterprise, meanwhile it proposes loan
application to the bank; the third-party logistics
enterprise is responsible for cargo inspection, value
evaluation and supervision, and issues certificate
document to the bank; the bank offers appropriate
loans to the manufacturing enterprise based on the
loan application and value evaluation.
This pledge financing method enables SME to
provide financing warehouse service through third-
party logistics enterprise, transforming movable
pledge that banks are reluctant to accept into
movable pledge that banks are willing to accept,
such as raw materials and finished products, in order
to build a capital financing bridge between the
enterprise and bank. Warehouse receipt
hypothecation loan and conventional loan business
have the following differences, refer to Table 1.
3 RISK ANALYSIS AND
CONTROL METHODS
Warehouse receipt hypothecation financing business
is a new financial business with multi-win features,
whose risks mainly involve the risk of commercial
banks, risk of borrowers and risk of hypothecation
guarantors (the third party logistics enterprises). The
risk of commercial banks mainly includes the credit
risk of borrowing enterprises, moral risk of storage
enterprises, etc; the market risk of product owner
enterprises is the chief risk. In real life, commercial
banks usually extend loan credit to the third party
logistics enterprise with powerful strength and
perfect system, and logistics enterprises serve as the
bridge to link three parties in the warehouse receipt
hypothecation financing business and often bear
major risks in the business chain.
3.1 Risks of Warehouse Receipt
Hypothecation Financing
For logistics enterprises, risky tache of warehouse
receipt hypothecation financing business are as
follows:
 Selection of movable pledge goods: fluctuation
of market price and changes of financial
exchange rate will result in the price and quality
change of movable pledge in a certain period of
time, and bring in the change of moveable
pledge cashability, thus not all commodity are
suitable for warehouse receipt hypothecation.
 Selection of client enterprises: the business
capability, business volume and legitimacy of
movable pledge products of the client are all
potential risks for warehouses; during rolling
extraction of goods, some manufacturing
enterprises will take substandard products as
fine products, so there is bad product risk and
also shoddy quality risk. To gain more
businesses, some third party logistics enterprise
would practice fraud with the loan enterprise
and make false asset evaluation to movable
pledge products. Some loan enterprises collude
with related staff of the third party logistics
enterprise to issue warehouse receipt and apply
loan from the bank though they have no actual
products, etc.
 Determination of loan amounts: the scale and
economic strength of loan enterprises are major
elements for the bank to determine the loan
amount. In the warehouse receipt hypothecation
financing business in China, the bank usually
extends credit to the third party logistics
enterprise to decide the loan amount and ensure
the safety of the loan.
 Management of warehouse receipt: the
warehouse receipt is the voucher of
hypothecated loan and taking delivery of goods,
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297

they are valuable securities and property right
securities, but the warehouse receipt issued by
warehouses at present are not standard enough,
for instance, some warehouses even regard
warehousing entry as the hypothecated voucher
and regard bill of loading as the voucher to take
delivery of goods.
 Normative nature of supervision: the
supervisory risk of pledge product is in the
aspect of pledge supervision, any information
asymmetry, information distortion or
information lag between the third party logistics
enterprises and the bank will lead to the faulty
decision-making of any party and cause
supervisory risk of pledge products.
 Internal management and operation: many
warehouses are low in informationization
degree, still lingering at the stage of manual
work, which will increase the faulty operation
of internal staff and result in management and
operation risks.
 Trace back of related laws: clauses as to
warehouse receipt hypothecation in “Guarantee
Law” and “Contract Law” are not perfect,
besides there are no other guiding documents
for reference, so there is risk of legal disputes.
3.2 Measures of Risk Avoidance for
Warehouse Receipt Hypothecation
Warehouse receipt hypothecation business is a win-
win product for manufacturing enterprises, banks
and the third party logistics enterprises. However,
logistics enterprises which bear major risks in the
business flow have to take the guarantee and
supervision responsibility of hypothecated products
and obtain new point of profit growth. Their
measures to avoid risks should include the following
aspects:
 Selection of hypothecated types. The products
under hypothecated warehouse receipt should
meet the following conditions: (a)clear
ownership; (b)small intangible wear, difficult to
get metamorphic, suitable for long-term storage;
(c)stable market price, little fluctuation, not easy
to be out of season; (d) multi-purpose, easy to
become cash; (e) definite specification, easy to
calculate; (f) eligible products which meet
national standard involving warehouse receipt
hypothecation business;
 Verify the property right of hypothecated
products. To avoid the faulty operation when
the product owner enterprise cheats about the
product source, the logistics enterprise needs to
verify the ownership, species, quantity and
quality of hypothecated products. On one hand,
they ask the pledgor to provide successive
product ownership evidentiary materials,
including sales contract, payment voucher,
value added tax receipt, transport contract,
navigational records, port supervision visa, etc,
so as to ensure the authenticity of ownership
and quality of hypothecated products. On the
other hand, check the internal accounts and
warehousing records to ensure that the quantity,
quality and warehousing time of the
hypothecated products match the storage
voucher and materials provided by the pledgor.
Meanwhile, the legality of hypothecated
product source should be taken into
consideration.
 Quantity control. Due to features of warehouse
receipt hypothecation, the hypothecated
products can pass in and out continuously given
the total amount of hypothecated products
satisfy the requirements, which advances the
supervisory difficulty of hypothecated products,
thus the control of the quantity and quality of
hypothecated products is another key point of
risk control. So we can use principal difference
to make evaluation from the angle of credit
position, use liquidate line difference to give
security with definite hypothecation rate from
the aspect of default probability, and use
warning line difference to give feasibility with
definite hypothecation rate from whether the
position of warning line is appropriate or not.
The use of these indicators can play a positive
role in the control of risks.
 Supervise and dispose hypothecated
commodities. Storage enterprises should sign
“storage agreement” with client enterprises,
issue special warehouse receipt indicating that
products have been hypothecated to the bank,
apply for storage insurance to appointed
insurance company, sign “Guarantee letter of
irrevocable assistance to perform hypothecation
right to the bank” with the bank, guarantee the
warehouse receipt match the product storage
situation, and with complete procedures; as to
commodity disposal, when the loan is undue,
storage enterprises can sell commodities by
floating down the current market price to a
certain extent, until loan principals are recalled.
When the loan is due, storage enterprises can
sell according quantity of stored products by
floating down the current market price to a
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certain extent, until loan principals and interests
are recalled.
 Release of warehouse receipt hypothecated
products. Once warehouse receipt is granted by
the bank and hypothecated loan begins to issue,
the loan officer would register detailed account
according to elements like warehouse receipt
number, date, amount of money, storage place,
etc. After each release, there should be
cancellation record under the according
warehouse receipt item until the sales complete
and all loans are withdrawn.
 Speed up the information-based construction of
logistics enterprises. Information system can
reduce the faulty operation possibility for the
sake of internal staff cheating, improve work
efficiency, increase the efficiency of
information communication and share between
clients and banks, reduce risks of storage and
banks, facilitate the supervision of bank to
storage and perfect the logistics service
provided to clients.
4 SUGGESTIONS OF
DEVELOPING WAREHOUSE
RECEIPT HYPOTHECATION
IN CHINA
Based on the comparison of warehouse receipt
hypothecation financing businesses both home and
abroad, related case analysis, learning of advanced
foreign experience, this thesis put forward the
following related countermeasures so as to promote
the development of warehouse receipt hypothecation
financing business in China:
 In terms of system environment, refer to western
experience and accelerate enacting of “Law of
Property” that suits our national situation, make
clear the ownership of property right, establish
public, high-efficient, united registration system
and electronic and network public notification
system of property right. Meanwhile, perfect the
processing mechanism after breaching the
contract, enable loaner to precisely forecast the
execution time and fees and the money recalled
from disposing hypothecated stored products.
 For industry environment, banks, logistics
storage enterprises cooperate with the loan
enterprises closely, making normative and
standard operation flow and detailed rules for
different warehouse receipt hypothecation
financing business modes. Cary out corporation
qualification cognizance system to logistics
storage enterprises taking part in warehouse
receipt hypothecation financing business, in
order to ensure the supervision level of
warehouse receipt hypothecation financing
business. Establish the information network
among banks, logistics storage enterprises and
clients, build the database related to warehouse
receipt hypothecation financing business, gather
information of hypothecated stored products,
financing enterprises and related industries, and
increase information share among various banks.
 As to basic business elements, related law and
policy restriction should be broadened, and
financing subjects should be enlarged to
increase capital source. Various commercial
banks, logistics enterprises and storage
enterprises should accumulate and share related
experience, make financial innovation actively,
and endeavor to enlarge the species and scopes
of pledges. Aiming at the special features of
circulating mechanism in China, we should
extend the financing strength for circulating
enterprises continuously and explore financing
approaches for manufacturing enterprises.
 As to business control methods, each financing
subject should make detailed analysis to the
specific situation and requirements of loan
enterprises, adopt appropriate storage and
supervisory methods that suit loan enterprises,
and provide more and more integrated high-
quality services for clients. Chinese commercial
banks should introduce credit grading
techniques from the west gradually, adopt VaR
method to determine the economic cost of the
business, carry out RAROC, the measuring
method of risk adjusting performance inside the
bank, in order to enhance the risk management
and control level of warehouse receipt
hypothecation financing business.
5 CONCLUSIONS
Warehouse receipt hypothecation financing is an
innovative financing method, one of the effective
solutions to solve the financing difficulty of small
and medium-sized enterprises and banks with
difficulty loan. The key difference between
warehouse receipt hypothecation financing loan and
other loan business lies in the storage company,
which serves as the credit agency between the loan
bank and loan enterprise. Currently, warehouse
receipt hypothecation loan business is still at the
STUDY ON DEVELOPING WAREHOUSE RECEIPT HYPOTHECATION FINANCING METHOD IN CHINA
299

starting stage in China, in view of the wide
development prospect of warehouse receipt
hypothecation financing loan and potential problems,
analysis and control of business risk are of great
importance. Meanwhile, the development of
warehouse receipt hypothecation financing method
should be accelerated in China.
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