Trade transaction volumes in Asia have reverted to 2019 levels over the past couple of months, leading to optimism for the prospects of a V-shaped post-pandemic recovery in the region, according to HSBC. Proprietary data from the global trade bank, seen by GTR, shows a sharp uptick in demand for core trade products – which comprise import documentary credits, exports bills and trade – with growth seen across the major markets of Hong Kong, China, Singapore and Malaysia.

“February normally tends to be soft because of the Chinese New Year, and then March tends to come back, but this year we had a sharp fall in terms of transaction volumes,” says Ajay Sharma, regional head of global trade and receivables finance, Asia Pacific, at HSBC, adding that by June the figures had bounced back, and have stayed steady into August. “When I put all of these points on a graph, it looks like a V-shaped recovery,” he says.

However, while transaction volumes have reverted to 2019 levels, order sizes have not, suggesting that the current volatile economic backdrop continues to weigh on buying decisions. “Transaction sizes are 10-15% lower, and my interpretation is that this stems from caution in terms of ordering, which means at a certain level, volumes are slightly down on certain products and there’s an offset in terms of margins, but overall, the business has held up quite well,” Sharma tells GTR.

Meanwhile, the bank is also reporting a notable upswing in supply chain finance (SCF) transactions, with increases of over 30% in Thailand, Vietnam and Indonesia in June, which could possibly reinforce economic theories on supply chain shifts into developing countries in Southeast Asia.

At the regional level, the bank, which carries out 400,000 transactions each month over 19 markets in Asia, reports an increase of 15% in suppliers joining SCF programmes, suggesting that growing numbers of Asian companies are turning to the product as the Covid-19 slowdown continues to place a squeeze on their liquidity.

“Our supply chain finance volumes year on year, August to August, are up 50%,” says Sharma. “There are two drivers to this. The first is the new sign-ups to SCF programmes. The second is that in February we reached out to dormant clients on our SCF programmes, and reminded them that they had a line of credit available to draw down on their invoices that were pending. Subsequently, more than 1,200 suppliers started using the facilities on a regular basis.”

The bank’s in-house data shows increased SCF activity in the consumer and retail sectors, as well as telecoms and tech. Perhaps unsurprisingly, the metals and mining and automotive industries have taken a back seat, as these sectors have been among the worst hit by slumping demand worldwide.

“There has always been a big need for getting working capital into supply chains,” says Sharma. “The big change has been that coronavirus has driven liquidity into the top end of the market. Our biggest and best customers do not and never have a problem, but now the extension of liquidity into the middle market is becoming impacted and there’s just a higher level of risk.” He adds that he has seen average receivables tenors among the bank’s Chinese clients increase by as much as 10 to 15 days, with these payment delays driving firms to seek out new ways to boost their working capital. “Our expectation right now in terms of the sheer demand that is coming through our pipelines is that this is a tipping point,” says Sharma.

This boom in demand for SCF has been seen around the world. San Francisco-headquartered SCF provider Taulia told GTR earlier this year that early payment volumes across its platform increased by more than 200% month-on-month in March, suggesting that the outbreak of coronavirus has led to “a critical need for liquidity to empower small businesses during this challenging period”.

Similarly, Atlanta-based SCF provider PrimeRevenue said that the proportion of invoices traded for early payment rose from 77% in January to 93% in March. It also attributed the steep rise to the impacts of Covid-19, as suppliers’ demand for cash surges due to “a global need for liquidity”.

However, ratings agencies – which have long argued that SCF can be misused by companies to obscure payment obligations and artificially boost their balance sheets – have cautioned that existing risks are likely to be exacerbated by the pandemic.

HSBC’s Sharma, along with other providers of SCF, disputes claims the practice is inherently high-risk, arguing that a well-managed programme “performs a greater good of financing those suppliers who do not have the same access to liquidity”, enabling them to generate employment and maintain their activity.

“We are living in very interesting times in terms of just the sheer use of risk mitigation techniques. We have gone from a scenario where there was too much liquidity and too little risk and everything was quite benign for the last 10 years, to a much more risky environment,” says Sharma. “You have to have a reasonably good risk management protocol around supply chain finance. At the end of the day there is a risk of misuse and that goes for any trade transaction, it’s not just supply chain finance. You just need to know how to manage these customers.”