Against all odds

Despite international concerns over wavering Chinese stability, trade finance bankers are prepared to take on the precarious situation, writes Shannon Manders.


Signs of a slowdown in China’s economic growth continue to reveal themselves, with reports indicating a deceleration of exports to the US and EU.

According to the purchase managers’ index, China’s manufacturing activity contracted for the first time in three years in December as expansion continued to slow and local factories felt the squeeze.

Moreover, China’s trade surplus narrowed to US$14.5bn in November from the US$17bn recorded in October.

But while the drop in both exports and imports has heralded doomsday prophesies from the local and international press, trade finance bankers in the region remain positive about future growth.

“The drop in surplus is not insignificant, but it’s not headline news. The surpluses have been so large and so consistent over the past several years that such a drop doesn’t indicate a major tactical shift,” says Kuresh Sarjan, managing director and head of global trade and supply chain solutions, Asia Pacific at Bank of America Merrill Lynch, adding that it’s “not so much a slump in demand as a single digit decline”.

Trade financiers also believe that while China may be monitoring the state of affairs, the government has yet to display any signs of unease.

“I think there’s a bigger picture that we’re looking at in terms of China increasing its own domestic growth as well as making sure that the pace of development is balanced,” says Kao Fang Ming, head of trade, China at JP Morgan.

The slump in the trade surplus is widely attributed to the appreciating renminbi (Rmb), rising inflation and a steady increase in labour costs; factors which all limit the room for export growth.

“There are some real issues out there that need to be addressed. But China still has a lot of potential. The opportunities still outweigh the risks if you can manage the real risks versus the perceived risks,” says Daniel Son, Wells Fargo’s senior vice-president, head of institutional trade sales, Asia Pacific, Middle East and North Africa. Moreover, many banks have seen their trade assets grow in spite of the challenges.

“We have tripled our assets in three years,” says Ravi Saxena, managing director, Asia trade head, treasury and trade solutions, at Citi. “It’s a staggering growth, and the growth is because there is a demand.”

Chinese businesses evolve

As Chinese companies in expansion mode seek to adapt to an environment plagued by liquidity concerns, they are looking beyond the country’s borders to take advantage of cheaper financing to drive their expansion.

A number of China-based trading companies are setting up in Hong Kong where they are able to borrow with ease due to the abundant liquidity and low inflation enjoyed on the other side of the border.

“It is so convenient for Chinese companies to set up trading arms in Hong Kong. And the Hong Kong market is much more attractive. For example, Rmb borrowing is 1% in Hong Kong, but rises to 5% in China,” says Narihiro Ohta, assistant general manager and head of trade finance, Hong Kong at Mizuho.

International companies also see Hong Kong as an important link to finding their way into the Chinese market.

“We’re seeing a lot of multinational corporations looking at how to gain entry in the China market and execute more trade finance using Hong Kong as a regional hub. And a lot of Chinese companies are looking to Hong Kong as a platform to go global,” says Tim Lee, executive director, head of treasury services, Hong Kong at JP Morgan.

China’s 12th five-year plan, a series of economic initiatives announced in Q1 2011, identifies the key targets of expanding domestic demand, upgrading of traditional industries and strategic development of new industries.

While continuing to play the role of the world’s manufacturing centre, China is being encouraged to use new technologies, processes and materials, and to explore new industries, including biotechnology, clean energy and high-end equipment manufacturing.

With the rise of high-value business taking hold across the country, banks are beginning to see an evolution of the supply chain as firms upgrade their offerings.

“This increasing sophistication is a natural progression that most countries go through,” says JP Morgan’s Kao, who notes that China is at the stage where it is building infrastructure for domestic consumption of green energy. “We’re definitely seeing more of a knowledge transfer building up in the infrastructure sector,” she says.

Dario Dellantonio, managing director, head of global transactional banking, Asia Pacific at Santander, notes that the Spanish bank has already been involved in renewable and solar power projects which have seen Chinese companies investing in renewable companies in Europe. “We see an increased role in financing these exports,” he says.

Whether China can continue to remain competitive on cheap goods is another question, and a number of bankers report seeing certain functions being moved away from China to other Asian countries – particularly in the textile industry, where manufacturing services are being moved to Southeast Asia.

“Cheap prices have always depended on low labour costs, which have recently been escalating,” says Mizuho’s Ohta. “Apparel and textile company Uniqlo first set up their manufacturing hub in China, but recently moved it to Bangladesh due to this increase.”

Yet Citi’s Saxena believes that China’s manufacturing industry remains the backbone of its industrial system, despite this evolution. “Look at some of the big names; where they started and where they are now. For example, now with telecoms, it’s not just about the cheap equipment, it’s about services. And some of the largest telecoms companies over the last five years sit in China.”

“Goods could move to services, Vietnam could compete with China; those dynamics may happen, but it’s still a huge powerhouse,” he adds.

Braving bureaucracy

Despite the opportunities for growth, international banks maintain that doing business in China is tricky, and that there are a number of hurdles to overcome; particularly when it comes to establishing a level playing field with the Chinese banks.

In December last year, Standard & Poor’s revised its rating criteria and gave two Chinese banks – Bank of China and China Construction Bank – higher ratings than many of their US counterparts.

The two state-owned commercial lenders were upgraded to A from A-, while the A rating on Industrial and Commercial Bank of China (ICBC) remain unchanged. The agency cut ratings on 15 of the world’s biggest banks, including JP Morgan, Citigroup and Bank of America amongst others.

China-based international banks are keeping a close eye on their Chinese counterparts, many of which now have global presence and aspirations and are set to be real contenders in trade finance deals.

ICBC in August 2011 purchased a majority stake in Standard Bank Argentina and earlier last year announced plans to open a bank in Brazil and buy a US lender. The same bank – which also has a 20% stake in Standard Bank – opened its first African representative office in Cape Town in late November, and in February last year doubled its presence in Europe by opening five additional branches.

“At least with the larger Chinese banks, they have the resources, the political backing, an increasing presence and overseas networks and partnerships; they have the power to dominate global trade by simply monetising their flows to and from China,” says Wells Fargo’s Son.

“It’ll be interesting to see how the Chinese banks evolve. I think they have the potential to not only be dominant players regionally, but to also be dominant players globally, especially in the emerging market trade corridors,” he adds.

Regardless of their success in their overseas set-ups, Chinese banks still face constraints imposed by their local regulators, reducing their competitiveness on their home turf and creating opportunities for international institutions operating in the China market.

“Compared to an international branch set-up, they’re still quite far in terms of taking up the big appetite, which is the financial needs of Chinese companies,” says Christina Siu, executive director, global transactional banking Asia at BBVA.

But this has not deterred international banks from looking to partner with Chinese institutions and tap into their vast local market. BBVA for one acquired a stake in China Citic Bank six years ago; outbidding two other banks to form an alliance with one of the national champions.

Santander is in talks with China Construction Bank about the possibility of setting up a banking joint venture that would seek to serve China’s substantial rural community. GTR