As Sibos returns to Asia for its 2015 edition, GTR speaks to stakeholders and experts from across the trade spectrum to find out why – despite the recent tumult in the markets – the continent remains the leading hope for global trade.
The Asian bank’s perspective, with Ivone Hodiny, head of structured trade, commodity and trade Finance at DBS Bank.
GTR: With some of the western banks struggling and retrenching, banks such as DBS have been actively expanding. Can you explain how this is the case?
Hodiny: In today’s financial landscape, many western banks may no longer see Asia as a core market amidst cost cutting pressure. Right-sizing measures by western banks create voids and opportunities for incumbent banks such as DBS to step in and expand their share within an increasingly challenging market. However, Asia is DBS’ home ground so very naturally, while we continue to look for the opportunities to expand outside of Asia – the most recent being the opening of our first Australian branch – the bank remains committed to grow and serve the Asian markets through its extensive regional presence and local market expertise.
GTR: Are there any advantages which Asian banks have over traditional powerhouses when doing trade business in the region?
Hodiny: There are major growth opportunities in the region, especially with the large intra-Asia trade flow. With rising consumption and economic development within Asia, western multinationals are shifting their focus into the region, and Asian companies are expanding within. There is also a rise in SMEs as a result of increased business activity, all of whom are seeking the requisite trade finance solutions to support their businesses.
Being in the heart of the region, Asian-parented banks are able to understand the local regulatory and market developments, and as a result deliver value-added solutions to corporates to help them navigate the uncertain and volatile market conditions. Asian banks are also in a better position to invest and adapt readily to transformative and rapidly emerging technologies as compared to our global peers as they are relatively more nimble.
GTR: What challenges do you think Asian banks face in expanding their business at a time when there are so many macroeconomic issues facing the world?
Hodiny: We are one of the key players in Rmb trade financing in the region and, like many banks that are active in this space, will see the impact of China’s slowing economy and weakening consumption. China, being the engine of global economic growth, cannot be ignored as the powerhouse that has spurred the increasing asset growth for many banks, including DBS.
The depressed commodity prices, the overall decline in transaction volumes and compressed margins which resulted from increasing competition due to the limited availability of opportunities, plus the emergence of the Chinese banks are proving to be key challenges in business expansion.
The recent devaluation of the yuan has also reduced banks’ ability to grow their assets as increased risk of defaults and non-performing loans become more pronounced while, on the other spectrum, customers are taking a wait-and-see attitude in light of the potential volatility and uncertainty of the People’s Bank of China (PBOC)’s next moves.
The fact that other dominant Asian economies such as India and Indonesia are also not seeing the anticipated growth and continue to face domestic challenges presents restrictive expansion opportunities into these markets for many banks.
The global bank’s perspective, with Bruce Alter, head of trade and receivables finance at HSBC China.
GTR: Do you agree that Asia continues to be the most dominant force in global trade?
Alter: According to the IMF, Asian economies will represent at least 40% of global economic output by 2015 and China will overtake the United States long before 2020, probably between 2015 and 2017. It seems that economists agree it is only a matter of time, by whatever measure. Additionally, India is the other important economic force in Asia to engineer global trade. So we think the trade volume in Asia has tremendous upside, hence it’s probably the most dominant force in global trade.
GTR: You’re responsible for the bank’s China business: how has the business environment changed there over the years?
Alter: The business environment in China has been changing a lot over the years in areas including Rmb internationalisation, free trade zones, state-owned enterprise transformation, the One Belt and One Road (OBOR) programme, the Asia Infrastructure Investment Bank (AIIB), and Rmb exchange rate reform. Overall I think the key direction of these changes represents China leaning toward a more open and connected economy to the world.
GTR: What challenges are faced when trading in Asia?
Alter: Most countries in Asia are still developing and experiencing dynamic changes in both economy and politics. These changes, for example as mentioned with regard to China, require the companies to have more insight, local intelligence and adaption to the markets in which they are doing business. They need to be more nimble than ever at adapting.
GTR: As costs of production rise in Asia, do you expect it to remain the production centre of the world?
Alter: Yes. Comparatively speaking, Asia’s political environment is more stable and international trade policies are also more open compared with other developing markets. Asia is still the most populated region in the world and the sophisticated industry clusters help keep its position as the production centre of the world.
GTR: In terms of trade finance and financial instruments, how has Asia advanced over the years – is it on par with the western world?
Alter: Overall, for cross-border international trade, it is becoming more and more similar to the western world. For domestic trading, it might differ since in some Asian countries there might be some specific payment instrument, for example in China, Bank Acceptance Draft (BAD) is a very common instrument for domestic trade, with huge transaction volumes today.
The supply chain financier’s perspective, with Eugene Buckley, general manager, Asia Pacific at PrimeRevenue.
GTR: As a global company, how does demand for your products and services in Asia compare with that elsewhere in the world?
Buckley: Certainly growth is rapid in Asia from the perspective of suppliers accessing the programmes and accelerating their working capital. From the large Asian corporate perspective, they are not as advanced as those in the west in offering supply chain finance (SCF) to their supply chains. The demand for access to competitively priced working capital or, in fact, just access to working capital, is very strong in this region and we expect the same growth trajectory for a number of years as SCF becomes more accepted.
GTR: Do you find that demand is spread evenly across the region, or mainly in the more “developed” hubs of Asia?
Buckley: In some respects, demand is equal across the board. We are seeing supply chains diversify into less well-developed jurisdictions, so demand is strong in the less developed world, almost by default. The more sophisticated hubs are usually where the buyer resides and so it is to some degree even.
GTR: What are the challenges that you’ve found in doing business in Asia, compared with other parts of the world?
Buckley: Regulatory and compliance issues tend to lead over commercial objectives. Clearly good compliance is necessary, however the overzealous application tends to add overheads and time to all things associated with financing trade. But that is probably a global position, and not just in Asia.
I would say Asian corporates do need to update their mindset in ensuring that their supply chain is competitively financed. From one perspective, a corporate is as competitive as its supply chain lets it be, and so many functions of commerce are enmeshed, that how your supplier accesses working capital and under what terms can have a big impact on the corporate’s own product and service offering.
GTR: While much is made of the huge trade flows into, out of and intra-Asia, many comment on the relative lack of sophistication of the trade and trade finance. Would you go along with this? Has it developed?
Buckley: I would agree there is still a great deal of legacy financing product in the region. These products are high margin and well entrenched for the providers of trade finance, so why change a good thing? This could be one way to look at it. It will, of course, change as better forms of financing such as SCF programmes take hold. As the transparency at the consumer end continues to grow and becomes more influential it will filter into the financing of trade via more sophisticated solutions. I think it will reach a tipping point sooner rather than later.
The academic’s perspective, with Dr Li Kui Wai, a China and Hong Kong trade expert at City University, Hong Kong.
GTR: Why are traders and financiers attracted to Hong Kong and how can they benefit from China’s expected fiscal expansion?
Li: Hong Kong is very open, that’s something we have to acknowledge. Look at the Rmb. Ten years ago, we had the first offshore centre. The trading of Rmb is becoming popular and now it’s one of the largest currencies traded in Hong Kong.
When it comes to the AIIB, there will be a lot of banking, lending and financial transactions, and a lot of it can come through Hong Kong, where the laws and efficiency plays have attracted foreign banks. Hopefully Beijing will allow Hong Kong to have an office, even a headquarters for the AIIB. Ultimately the decision will be political, but hopefully Hong Kong can share the pie in financial terms.
GTR: So you think that Hong Kong could be the lending centre for the deals done by both the AIIB and through China’s One Belt, One Road (OBOR) programme?
Li: Maybe not the entire lending structure but the transactions, the laws and legal papers could be done here. While China will be doing the lending through its policy banks, the expertise in Hong Kong means the accounting and reporting can be done here.
OBOR will stretch from China to Western Europe and Hong Kong is on the edge of that route. When it comes to the practical aspect, a lot of these countries may not have a very strong financial sector. Hong Kong, Singapore and Japan tend to be the strong financial centres here. All these countries along the OBOR may be drawn to Hong Kong in order to use the mature financial services.
So primarily, the benefit may be banking and finance. Then maybe given the trading history here, there may be the shipping aspect. The maritime laws and legal aspects of the sea routes may be done in Hong Kong too, so we could benefit on both fronts.
GTR: Is Hong Kong becoming more of a trade facilitation centre than a true trade hub?
Li: Hong Kong has been acting as a medium between China and the rest of the world. It’s very small, efficient and effective, with quick and world-class communications. The reliability and lack of corruption is why foreigners come to Hong Kong. It’s the number one financial centre in China, followed by Shanghai. But with regards to regulation and efficiency in services, they’re a long way behind.
GTR: You’re saying Hong Kong is much more welcoming to foreign businesses than the rest of China?
Li: Yes, it is and the government is always trying to improve. Even though we’re number three in the world as a financial centre, in terms of the quantity, we’re way behind. There’s a big gap. We’re very close to Singapore and Tokyo. The government has been trying to diversify to create a gap. For example, in areas like Islamic finance and commodity finance, or even extending the trading hours: overnight trading, to capture the NY and London markets, we’ve been doing all of that.
GTR: There has been a lot of talk about HSBC moving its headquarters to Hong Kong. Is this something you can see more of in the future?
Li: It would be nice for banks and companies to choose to be headquartered in Hong Kong because it’s close to being a tax haven. Our corporation tax is around 16% and hasn’t changed for 20 years. The income tax is about 15.5% on average. It’s very efficient and reliable for foreign companies. The accounting is simple: the tax form is so simple. You pay 15.5 to 16% and keep the rest.