Roundtable: Asia trade finance leaders discuss emerging trends

GTR’s annual Asia trade leaders roundtable discussion, held on the sidelines of the GTR Asia event in September, gathered senior trade finance bankers in Singapore to discuss macroeconomic trends, evolving client demands, digital transformation and the perennial hot topic of sustainability.

Roundtable participants:

• Maisie Chong, head of trade and working capital, Asean and South Asia, Standard Chartered
• Megha Chopra, head of Apac trade sales and client management, Citi (host)
• Belinda Han, head of transaction banking Asia Pacific, MUFG
• Ashutosh Kumar, head of global transaction banking, Asia and Oceania, Mizuho
• Rakshith Kundha, head of trade and supply chain finance, Asia Pacific, Bank of America
• Matthew Moodey, head of trade finance and lending Apac, Deutsche Bank
• Sriram Muthukrishnan, group head of GTS product management, DBS
• Ian Tandy, Asia Pacific co-head of global trade and receivables finance, HSBC
• Shinichiro Yamazaki, head of transaction banking, Asia Pacific, SMBC
• Eleanor Wragg, senior reporter, GTR (moderator)

GTR: With economic growth in the EU and US slowing sharply amid sluggish consumer spending and sticky inflation, analysts are predicting that several years of strong export growth in Asia will reverse in 2023, while the outlook for domestic demand will also be challenging as interest rate rises filter through local economies. What impact are you seeing on flows, and what have been the stand-out trends – both positive and negative – for you over the past nine months?

Chopra: The operating landscape continues to face macroeconomic headwinds. Recessionary trends compounded by rising interest rates have dampened prospects for global growth while heightening uncertainty. Geopolitical tensions are also influencing the economic landscape.

From a banking perspective, supply chains, which are fundamental to trade financing in the region, saw considerable pressure across multiple markets. This strain was partly due to the build-up of inventory, leading to overcapacity and subsequently softer demand. High interest rates added to this complexity, causing suppliers to be cautious and hesitant to engage in discounting activities.

In Asia, the region’s largest economy, China, has shown signs of slowing growth, a trend mirrored in closely connected Hong Kong with weakening imports and exports.

However, it is important to note that Asia’s economic story isn’t solely about one market. While China and consequently Hong Kong are facing challenges, India is experiencing robust growth in both exports and its domestic economy. Similarly, Asean nations are increasingly significant in the reorientation of global supply chains. In sum, challenges coexist with opportunities in Asia.

Kumar: Amid Asia’s diverse landscape, countries’ economic performances vary – some rise while others decline, presenting both opportunities and challenges. Currently, we’re seeing an economic slowdown, but this aligns with expectations as higher interest rates typically lead to decreased economic activity. The benchmark interest rate, now at over 4%, is significantly higher than the previous 1% or lower, and is eroding confidence and dampening demand for trade finance.

Opportunities are emerging, albeit selectively. India, for instance, continues to exhibit strong demand. This demand is driven in part by increased inventory levels requiring financing, either through supply chains or from an inventory perspective.

The impact of China’s slowdown is profound, although the full extent may not be fully reflected in the data yet. It’s not just about China’s internal changes but also how Chinese supply chains are relocating to other countries like Indonesia, Vietnam and parts of Malaysia. This relocation isn’t limited to western companies leaving China; Chinese companies themselves are setting up bases elsewhere.

The next six months will be pivotal in understanding these dynamics – how supply chains adapt, how trade evolves, and how demand shapes up. Interestingly, there currently seems to be more supply of trade finance available, particularly for well-rated corporates, than there is demand.

Muthukrishnan: Delving deeper into the situation, China’s economic status is a major factor affecting the whole of Asia, especially in the commodities space. As the largest offtaker of commodities, any reduction in Chinese demand impacts global trade volumes and prices, from metals to energy.

On liquidity, there’s a surplus at the higher end of the market, with liquidity chasing top-rated credits, leading to highly competitive pricing. However, at the lower end of the supply chains, particularly in emerging Asia, there’s still unmet demand. This presents an opportunity for banks to step in, albeit cautiously due to the changing risk landscape. The effective use of data is crucial to enabling that to happen.

Lastly, while traditional trade finance, particularly in commodities, has seen a dampening effect, other areas like supply chain and digital-led open account financing have shown resilience. The core demand in supply chains is recovering, albeit not yet at peak levels. This recovery is driving the need for inventory finance, influenced by longer holding periods, providing another area where banks can support their clients.

Kundha: In terms of supply chain shifts, a notable development occurred in July 2023 when Mexico and Canada emerged as the top two exporters to the US, overtaking China. This shift raises questions about whether it reflects a long-term change in supply chains or is simply a temporary result of last year’s inventory dynamics. China continues to be a key player in global supply chains, but it is also evident that manufacturing capacity is developing in other parts of Asia.

Another interesting trend is the increasing preference for local currency financing over the US dollar, likely driven by rising liquidity costs and interest rates in various economies. While these changes seem short-term, underlying macroeconomic currents suggest a more extended period of adjustment before we can fully understand their implications.

Chong: Expanding on the previous points, we’ve observed our clients adapting to high dollar interest rates by opting for local or cross-currency financing. This shift towards more flexible financing methods, including shorter-term loans, reflects a strategic approach to managing working capital under current economic conditions. Some clients are also actively managing their balance sheets, frequently adjusting their loan positions.

On a positive note, despite the general economic slowdown, there’s optimism regarding Asean. The region has seen strong foreign direct investment inflows. For instance, while Vietnam’s exports have declined so far this year, the potential for growth remains, especially with the increase in domestic manufacturing. At Standard Chartered, we’re focused on assisting our clients at the local level, leveraging on the unique opportunities and navigating challenges in the different markets across Asia. It’s clear that Asia’s diverse economic landscape and growth opportunities require customised support beyond viewing it as a single regional entity.

Tandy: I wholeheartedly agree that Asia is not a homogenous region. Since moving here from London, I’ve observed three core themes. Firstly, supply chains are a critical C-suite issue, especially post-Covid and with the challenges around inventory management. Secondly, there’s an increased focus on optimising working capital, considering local currency needs and the impact of rising interest rates. Lastly, and perhaps most importantly, is the growing emphasis on sustainability in supply chain and trade finance. Our clients are becoming more proactive in addressing supply chain emissions and seeking sustainable finance solutions. We’re seeing a surge in mandates and discussions around sustainable practices, indicating a significant shift towards prioritising environmental considerations in trade finance.

Han: We’re seeing an uptick in intra-Asia trade, partly due to the China-US trade dynamics. This shift emphasises the importance of Asia in the global trade arena and underscores the need for adaptable and innovative trade finance solutions to support this evolving landscape.

The trends we see include a rise in the demand for unfunded trade finance, such as guarantees, especially for infrastructure projects in various Asian countries like the Philippines. This increase is partly due to a more cautious approach to risk management.

Another trend we see is the continued growth in renewable energy and related sustainable trade finance transactions across APAC. MUFG is the largest project finance bank in the world and this expertise lends itself well while financing renewable projects as well as structuring sustainable trade asset financing.

Moodey: In addition to the points already raised, we are seeing specific changes within certain supply chains, particularly those driven by government policy and market demand, such as renewables. China is a key player in renewable manufacturing, especially in solar and wind energy, and boasts the highest installed capacity. However, the dynamics vary greatly across Asia Pacific, influenced by each country’s policies, access to capital, and current inflation rates.

For instance, high inflation is making it challenging to secure long-term contracts in the renewables sector, leading to a slowdown in investments and decarbonisation efforts. Each country within the Asia Pacific region faces unique challenges and opportunities in this regard. Southeast Asia, for example, is grappling with transitioning from coal to more sustainable energy sources, which is both costly and complex. This transition requires diverse financing approaches and government policies tailored to each country’s specific needs and circumstances.

Additionally, the electric vehicle (EV) market is emerging as a significant area of focus. Different government policies, such as the US Inflation Reduction Act, are influencing global investment flows and supply chain dynamics. The situation is complex, and we’re seeing demand rise for new strategies and financing vehicles to navigate these shifts.

Yamazaki: While we hear a lot about a general slowdown in trade, it’s not uniform across all sectors. For instance, in commodities, we’re observing notable trends, especially with China’s influence in certain markets. The EV sector, in particular, is seeing strategic movements and significant government intervention. Japanese companies, for example, have been actively building connections with Chinese car manufacturers, forming new supply chains.

Additionally, we’ve seen a spike in demand for semiconductor manufacturing equipment in recent months. This surge in activity indicates that, although some areas are slowing down, others are rapidly heating up, presenting unique opportunities for trade finance. As banks, we are closely monitoring these developments, recognising the potential for these sectors to become key components of our trade finance portfolio.

GTR: What trends are you seeing around what corporates are asking for, and how has that changed over the last year?

Chopra: From a corporate perspective, several factors are impacting businesses today. High interest rates have raised the cost of capital, demanding careful consideration of returns on every dollar spent. Supply chain complexities, whether related to stocking, critical goods or entering new geographies, require significant time, effort and capital to manage. Additionally, the current recessionary environment is slowing consumer demand, pressuring margins and cash flows.

The survival mantra today is cash. Corporates are increasingly focused on managing liquidity. The primary conversation revolves around optimising working capital and increasing the availability of cash without excessive leveraging. This has led to a rise in the demand for structured trade, particularly in monetising receivables, which is now a common topic not just for multinationals but also local corporates across multiple markets.

Traditional trade is seeing a resurgence, as corporates mitigate risks especially in new markets and with new customers. The partnership between banks and insurers to provide structured solutions for risk mitigation and liquidity is also becoming more pronounced.

Kumar: When discussing working capital optimisation with clients, we see a distinct difference now compared to the past. Before, the strategy was to push working capital requirements into the supply chain, but the current high benchmark interest rates make this approach less viable. The gap between the buyer’s and supplier’s borrowing rates is not as advantageous for financing as it used to be.

Companies are struggling to optimise working capital effectively. They’re returning to traditional methods, making sales more efficient, collecting payments quicker and reducing payment frictions in the supply chain.

Muthukrishnan: We’ve touched on several topics, but advisory is becoming increasingly valuable, especially in new markets amid macroeconomic and geopolitical turmoil. Clients are more open to advisory conversations about risk mitigation and feasible strategies. This trend isn’t confined to large corporations; midsize companies are also engaging more in these discussions. Another key area is currency diversification. While the dollar remains dominant, there’s growing interest in renminbi and other regional currencies for risk management and to diversify currency portfolios.

Han: On our part, we’re seeing an increased demand for financing renewable energy projects, such as the use of guarantees and letters of credit for solar panel imports. This ties into documentary trade as part of project finance. Additionally, optimising working capital isn’t just about trade finance; it’s a blend of trade finance and cash management. We’re not only structuring trade solutions but also helping clients accelerate and streamline cash collection via MUFG branches and our partner bank network, ie, the four regional banks we invested in, ultimately improving the working capital cycle.

Yamazaki: We’re not seeing as much demand for green trade financing and sustainability-linked supply chain finance as expected. Occasionally, it comes up, but the uptake seems relatively low.

On the advisory front, we’ve noticed an increase, perhaps due to the recent slide in the Japanese yen. This has led to a surge in hedging requirements and changes in supply sources. We’re also seeing a need for advisory on foreign exchange aspects, combining trade with cash management. Clients increasingly seek integrated services rather than separate cash, trade and FX offerings from banks.

GTR: Is there still the same kind of demand as before from anchor clients for ESG-linked solutions such as sustainable supply chain finance?

Kundha: We’re seeing ongoing conversations about sustainability, but they’ve evolved to become more specific. Now, there’s a focus on specific targets and effective ways to measure, verify, and report sustainability efforts. It’s becoming time-bound and detailed. From a financing perspective, tools like supply chain finance can aid in achieving sustainability goals, with procurement teams often leading these initiatives. The challenge lies in accurately measuring these efforts, which is where significant time and energy are being invested.

Chong: We continue to support clients to drive climate action by leveraging sustainable supply chain finance.

Across industries, data verification is still at a nascent stage. There needs to be more robust methods to benchmark and validate corporates’ self-reported data. Greater transparency, traceability and accountability will help narrow gaps in sustainable finance. We’re committed to working with our partners and clients to address these gaps and risks in the supply chain ecosystem.

Chopra: There are a few challenges in accelerating sustainability efforts in Asia compared to other regions. One significant issue is the lack of stringent timelines and regulatory mandates, which can dilute efforts despite good intentions. Companies set targets and roadmaps, but execution often lacks regulatory pressure. A large proportion of our client conversations reveal struggles with third-party verification and complex supply chains. Despite some successful sustainable supply chain finance cases, those bottlenecks are still holding back uptake. To address this, we’ve introduced an over-the-counter green trade loan solution for clients who cannot manage the entire chain of suppliers, giving them the ability to still make progress on their green efforts.

Another interesting development is export credit agency (ECA) support for infrastructure sector deals, where traditional bank financing can be limited. ECAs’ specialisation in new energy and renewables is becoming crucial, not just for liquidity but also technical expertise. Once an ECA endorses a project, it gains credibility. ECAs have become particularly active and flexible in sustainability projects, perhaps due to Asia’s emerging status as a renewable energy hub, presenting numerous opportunities for diverse projects.

GTR: Amid the near unstoppable growth of cross-border e-commerce and virtual marketplaces in Asia, what opportunities are there for you to capture new flows and support this trade? To what extent is the so-called ‘new economy’ an area of focus for you?

Muthukrishnan: The growth of e-commerce and online commerce is completely revolutionising trade in Asia, making it more retail-oriented and direct-to-consumer focused. In Asia, we’re witnessing an annual growth rate of e-commerce of 20-45%, even in a subdued trade environment, indicating an unavoidable shift towards digitalised trade finance. For banks, this shift requires handling high volumes of small-value transactions rapidly, with instantaneous fulfilment and settlement. This goes beyond just payment processing; for example, we’re exploring sophisticated data analysis to keep pace with financing requirements.

Embedded financing on digital platforms is the need of the hour, and banks need to integrate services seamlessly. Financing decisions are going to have to be based on data analytics rather than conventional balance sheet assessments. Additionally, managing fraud and compliance through technology is vital to maintaining the integrity of these rapid transactions.

Kumar: Particularly in countries like China and India where e-commerce is deeply integrated, the high volume and unique nature of e-commerce transactions means we have to rethink our traditional approaches.

This shift isn’t just about growth; it’s a transformation of traditional trade into a new, digital era. We’re seeing a transition from physical stores and distribution networks to online platforms, changing the way banks engage and assess risk. This includes addressing fraud risks and compliance in new ways. The increasing demands of these platforms, coupled with their rapid growth, necessitate quicker decision-making in finance. While currently focused on retail goods, I anticipate a broader range of trade, including traditional commodities and services, moving to these platforms. Our challenge in transaction banking and trade finance is to adapt our products to these platforms while enhancing our risk understanding.

Kundha: When it comes to e-commerce, scalability is extremely important. Order sizes may be small with volumes being very high – many clients in this sector need to manage a large number of invoices and purchase orders. We’re developing methods to fully digitise this process, employing AI for efficient matching instead of manual methods. As transaction volumes increase, these kinds of innovations are what will enable us to manage these volumes without encountering operational issues.

Chong: Accelerating speed to market is a key focus for us in this context, particularly in terms of managing risks, especially with long-tail suppliers. To address this, we’ve carved out specific strategies, such as investing through SC Ventures in supplier platforms that we traditionally might not have financed through our regular channels. This enables us to bank across different client groups and help make a meaningful difference to the wider ecosystem.

Tandy: The pace of digitisation across this region is both intense and immense. The integration of services like Grab into everyday life is remarkable. We do need to do things differently, but that isn’t to say that our traditional trade finance operations, dealing with bills of lading and other fundamentals, are no longer important. What it does mean is that our traditional trade finance expertise must now extend to understanding and integrating into a multitude of digital systems and platforms. Recognising this, we’ve formed partnerships that make sense to us, in order to enhance our capabilities. We’re also educating our teams to keep up with this rapid transformation.

Han: When discussing future strategies with our clients, one of the focus areas is increasingly on enhancing online sales through various channels.

One of our approaches involves further embedding trade finance solutions into digital platforms. For instance, one of our partner banks provides payment undertaking and import finance to an e-commerce platform for trade between China and Southeast Asia. Additionally, to adapt to new credit assessment methods, we’ve established a joint venture with an Israeli fintech, Liquidity Capital. This partnership specialises in using AI for credit scoring, enabling quicker credit decisions, particularly for startups. This initiative represents our commitment to transforming traditional credit processes and expanding our support to emerging business models.

Chopra: Much has been said about the evolving e-commerce landscape for both goods and services, and I concur that trade finance banks are not fully equipped to handle this shift yet. Citi is at the forefront of this shift. As a global bank with 95 markets worldwide, we are helping clients expand into new areas of commerce. This is true for both large corporates as well as the mid-market segment, where we are actively supporting trade for Citi Commercial Bank clients. We are strengthening our ecosystem to support these clients and considering potential collaborations with alternate lenders to manage risks effectively and complete the chain.

Yamazaki: On the data aspect, substantial investment is required. Currently, we’re encountering a vast array of data in various, often unstructured, formats. Analysing this data to enhance our bank’s capabilities and manage risks effectively is an ongoing process.

It’s clear that no single bank can tackle these challenges alone.

Chopra: I envision a future, perhaps a few years down the line, where data sharing becomes prevalent among us. This could enhance our capabilities significantly because despite our sector’s traditional nature, we need to start thinking more like tech companies. Data sharing, with the right security parameters in place, is critical for achieving the speed and analysis capabilities we’ve discussed.

Muthukrishnan: The cost of one-on-one collaboration is high. We need to be able to plug into single information highways. Initiatives like SGTraDex in Singapore, and ONDC and TReDS in India, are great examples. These platforms enable us to offer more efficient financing or services. As an industry, we should actively support such initiatives.

GTR: Where do your strategic priorities lie with regard to trade digitisation? Do you still see value in consortiums and networks or are you narrowing the focus?

Chopra: From a Citi perspective, our priority is making trade financing more frictionless for clients, focusing on collaboration and data sharing. While we are keen on digitisation, we are deliberate in our approach and cautious about adopting new technologies that may face adaptability or scalability issues. We are enhancing our existing digital platforms in supply chain financing and electronic trade loans, creating a seamless experience akin to the ease of using B2C services.

Banking partnerships play a crucial role in this strategy, particularly in how we manage our supply chain finance assets through a network of nearly 100 banking partnerships. This aspect of digitisation, which allows for a one-click selling of assets, may not be as visible but is vital to building solutions at scale.

Tandy: Efficiency and client needs are at the heart of our approach to trade digitisation. We’re committed to creating frictionless experiences, evidenced by our array of new, digitised products ranging from trade and working capital to integrated supply chain finance. As a leading player in trade finance, staying abreast of all developments is crucial. However, there are limited hours in a day. Our goal is twofold: to be led by client needs and to enhance efficiency. Ultimately, the potential of digital to make trade finance more accessible to a broader range of customers than ever before is what drives us.

Han: Digital capabilities are increasingly pivotal in clients’ selection of trade banking partners. We took a two-pronged approach. On the one hand, we’re focusing on enhancing our own platforms, automating processes in documentary trade and supply chain finance, and developing digital distribution capabilities. On the other hand, we collaborate with fintechs and external platforms to better support clients’ evolving needs. If our clients are on those platforms, we will ensure that we establish the necessary partnerships to support clients with their trade finance requirements.

Moodey: We’re actively investing in digitisation, and a key area of focus is around partnerships with fintechs, but they really need to offer something unique, be that faster processing or larger volumes, or an ability to bring innovative solutions to the table.

Progress on digitisation, especially in documentary trade, hasn’t been as rapid as expected, partly due to regulatory and legal frameworks.

The technology exists, but what’s needed is standardisation, ideally led by international bodies like the ICC or ADB, along with government support. Internally, we can improve our systems, but broader transformations in documentary trade depend on policy and regulatory changes.

Yamazaki: In terms of documentary trade, we’ve worked as part of a consortium and in joint ventures, but the adoption of technology hasn’t been as rapid as initially expected.

The excitement and investor interest that was high five years ago has somewhat diminished. It’s not the technology at fault but rather the need for the entire trade industry to embrace it. This process is gradual, as building a network requires various parties to come together.

We do collaborate with fintech companies, exploring both front-end and back-end digitisation. Our focus is on aligning with customer needs, investing more where our customers demand it.

Chong: We recognise the need for innovation. To give one recent example, we’ve collaborated with Linklogis to pilot the issuance of assets-backed security tokens, as part of the Monetary Authority of Singapore’s Project Guardian.

Most importantly, we’re focusing on our mantra of being ‘easy to bank’. A key focus has been simplifying banking processes; for instance, reducing the steps in financing processes from five clicks to one or two. It’s a long-term commitment, spanning three to five years, with substantial investment. We recognise this as an essential move to enhance the customer experience and to increase competitiveness. Ultimately, our goal is to streamline the banking experience for our customers.

Kundha: Regarding digital interaction between the customer and the bank, we, like most banks, have a digital proposition. However, for end-to-end digital integration across the supply chain, we believe a hybrid solution may help increase adoption, given the varying digital maturity levels across different supply chain segments.

Our strategy with fintechs is client-centric. Some fintechs are especially good at handling the mechanics of delivery of a trade finance solution – if our clients require it, we will find a way to work with that fintech to be able to deliver for our clients.

An interesting aspect that is emerging is technology that enables tracking not only the movement of goods but also their condition. This is significant because trade finance heavily relies on documents, digital or paper, as it’s traditionally challenging and expensive to monitor the physical flow of goods. These technological advancements, offering low-cost tracking, could revolutionise the fundamentals of trade finance. Although it’s unlikely to materialise in the immediate future, the potential impact over the medium to long term may be substantial and worth watching.

Muthukrishnan: Over the past five to seven years, our predictions have come to fruition, albeit not at the scale we anticipated. For instance, we’ve longed for better legislation, and it’s gradually becoming a reality across various jurisdictions with the adoption of MLETR. The use of electronic bills of lading in real production environments is also starting to emerge. A recent example is our first transaction in India using the TradeTrust platform. This adoption is not limited to major global or regional banks but is becoming more democratised.

The challenge lies not in technology, which exists and is robust, but in the synchronised movement of legislation, regulations and technology. Legislation and regulation, often treated as separate entities, need to align. For instance, even with electronic document legislation, if anti-money laundering regulations remain archaic, there’s a disconnect. Progress requires these facets to move in harmony, which is complex and multi-pronged.

At DBS, our approach to digitalisation and platform integration is customer-led. We’ve eliminated the proprietary versus external platform dilemma, focusing instead on customer preference. If our customers are active on a particular platform, we ensure our presence there, avoiding the hassle of switching between platforms. This strategy is facilitated by the use of APIs, which allow us to leverage microservices effectively. In trade finance, we’ve developed over 60 APIs, with a total of 250 across transaction banking. Our aim now is to create complex APIs that combine multiple functions, simplifying the process for customers who require diverse services.

We also focus on demystifying technology for smaller customers, emphasising ease of implementation.

For example, we often explain that integration can be as simple as four lines of code. We spend considerable time and resources educating our customers, particularly the smaller ones who may lack access to these technologies. We remain optimistic and believe we are moving in the right direction.

Kumar: Our strategy primarily revolves around customer needs, aligning with their digitisation agendas. The challenge, however, lies in choosing the right platforms to connect with. With multiple key platforms in existence, and despite the availability of APIs, connecting to each still incurs friction and cost. Therefore, finding the right balance in this decision-making process is something we grapple with daily.

Regarding digitalisation in trade finance, such as the adoption of electronic bills of lading and the evolving regulations in various jurisdictions, progress is contingent on legislation catching up. It’s a journey we’re on, and meaningful change in this area may take beyond the next 12 to 18 months to materialise.