Finbarr Bermingham reports from GTR Asia Trade Finance Week, where China was on the tip of everyone’s tongue.

“A rising tide lifts all boats” is an expression commonly associated with free market, neoliberal policy, and the idea that those who benefit first are society’s highest earners, with the subsequent wealth created trickling down, eventually reaching those at the bottom of the chain. How ironic, then, that the tide on which we’ve been relying on to keep our boats afloat in recent years has been Chinese: a product of state-sponsored capitalism, protectionism and chequebook diplomacy.
For those bobbing on the buoyancy of China’s exponential rise, that sinking feeling has begun to set in, and it looks as though it may be here for some time to come. The spectre of the Chinese slowdown loomed large over GTR Asia Trade Finance Week in Singapore, one of Asia’s biggest trade gatherings, as those in the sector debated whether we were entering a “new normal”, and others argued over what form this new norm would take.

Commodity prices are low – good for consumers, bad for traders. The smart money says they will stay low for the foreseeable future. Deal volumes are down – a gauge reading that doesn’t really have any obvious benefactors. Those looking for light at the end of this particular tunnel end up squinting in the dark.
China’s efforts to rebalance the economy towards a more consumption-based model have been strewn with difficulties. Its clunky stock market interventions in the middle of the year reeked of desperation. Its efforts to adjust its currency may have pleased policymakers at the IMF, who claimed it pushed the renminbi closer to market value, but drew the ire of both sides of the American political spectrum, which urged their national negotiators to push for a currency manipulation clause in the Trans-Pacific Partnership (TPP), a massive trade deal that may one day count China as a member.

But some context is required. China’s official quarterly growth is 6.9%, meaning that it is likely to come in close to its 7% target growth for the year (sceptics, however, would argue that you need not be a forensic scientist to see that these particular books are ones that have been overcooked for years). This comes at a time when countries in the west greet 0.5% growth rates as huge achievements.

The mood in Singapore was often fraught, sometimes pessimistic. Others adopted a more sanguine approach, espousing the cyclical nature of commodities and, indeed, economics in general. But one thing that was not in short supply was topics of conversation.

Transcendent impact

Jayant Menon, lead economist at the Asian Development Bank, expressed concern for the impact on the Asean trading bloc, which has become intrinsically linked to China’s economy. China is the largest trading partner for the group as a whole and for each of its member states, while it has also been the biggest investor in the bloc.
“Previously we looked to Asia as a buffer, but it’s not immune anymore,” Menon told the audience in Singapore. “We now hope the US recovery will lead to a return to growth.”

Insurers said that the risk perception of China is growing around the region, with the latest economic problems coming after a litany of scandals in the commodities sector and amid a reported power struggle in the upper echelons of the Chinese Communist Party. Xavier Farcot, head of risk underwriting for Coface Asia Pacific, said that concerns relating to China have been on the rise and that the country certainly carries a higher risk rating than it did a year ago. “Definitely everyone thinks the risk is increasing,” he told GTR. “I would also remark that maybe it’s coming back to the risk we were used to before 2008. You would say the high risk was in emerging markets, good risk in industrialised countries, then it kind of reversed somehow and now we’re coming back to a more usual situation. It’s not exact. We have a transition period in China, so fundamentals are still okay, but you have this bad habit of overcapacity with a bubble being built. And when the environment is less favourable we tend to see more issues appearing in terms of payments or credit terms.”

Farcot added that there has also been an increase in claims and defaults, especially in commodity trading. “We’ve seen some situations where buyers are sitting on stocks at a high price and not able to sell the stock for that price. We’re talking overload of inventory and a situation eventually where the bank was cutting lines. The major impact is the default payment to the suppliers. So we see a lot of negotiation going on, each party trying to support the other. But there’s definitely a deterioration and we’re much more cautious in streaming our exposure and making sure it’s properly used,” he said.

Commodity bankers

The slowdown in Chinese construction has hammered prices in iron ore, steel, copper and other key markets. This is where the debate over a “new normal” kicked in. “I don’t even know what new normal means,” said Pat Welch, head of commodity trade finance, Asia Pacific at UniCredit. “It’s saying yellow is the new black. Commodities are cyclical. When I started in the industry a while back, oil was US$10 a barrel. It’s hit US$160 and now it’s back to US$60. I’m not sure what the new normal is but the commodities business is perfect supply and demand. Price is one of the main factors. Yes we’re in a lower price environment and you’ll see certain responses especially on the supply side. For people who are requiring resources, it’s good. It’s non-inflationary: oil is lower, inputs are lower… I don’t know if I’d say it’s a new normal because prices will probably go back up again.”

Paul Gardner, global head of structured commodity finance at Westpac also laid the blame at the feet of producers, which have refused to cut production, despite a surplus of commodities on the market. But his comments aligned roughly with those of Welch, as commodity financiers seemed keen to downplay the perceived “China crisis” as a something more resembling a correction.

“What’s really happening is what we get in every lower core supercycle: we have a correction. Why have we had a correction? Because we have too much supply. It’s not the demand side, we simply have too much supply. What you get in every supercycle: it kicks off and there’s not enough supply. Then investment comes because there’s massive demand, you get a massive amount of projects kicking off. Then lo and behold you have too much supply. That’s exactly what’s happening now, when you look at iron ore and aluminium. It’s nothing to do with China slowing down per se, of course it’ll have a little impact because it’s not growing fast enough to take the excess capacity,” he said.

This supply shows no sign of abating. In the iron ore sector alone, the world’s largest mine – the Roy Hill facility at Pilbara, Western Australia – is set to start producing this year. This will compound prices, which have hit near-decade lows in recent months.

On the sidelines of the event, some delegates said that they are receiving frequent calls from clients wondering how they can get their money out of China, with a lack of transparency as to the reality of the economic situation being blamed for the panic. Others are looking to China’s next policy moves with fear. It’s thought that as part of the new Five-Year Plan announced in October (details of which have yet to be released), China will try to move towards a more climate-friendly economy. Part of this will be a move away from coal, with China likely to become a net exporter of coal, after years of heavy consumption.

Asia is still accounting for a far greater share of global trade flows than any other region, and some parts of the region – Vietnam was namechecked frequently – are showing great promise. Perspective is important, but the whispered pessimisms in Singapore suggest an underlying concern that traders and those that fund them may no longer be able to rely on the region to pull them through the next years as it has for the last few.