GTR recently gathered a group of senior industry experts in Singapore, as the trade war started to heat up. In this, the first of two reports on their discussion, they debate the state of the market, as well as the effect to date of the US-China trade war.


Finbarr Bermingham, Asia editor, GTR; Natalie Blyth, global head of trade and receivables finance, HSBC; Yongmei Evers Cai, partner, Simmons & Simmons; Kai Fehr, head of trade, Asia Pacific, Wells Fargo; Atul Jain, head of trade finance, Asia Pacific, Deutsche Bank; Agatha Lee, head of trade sales, Asia Pacific, JP Morgan; Daniel Lit, executive director, global trade product management, global transaction services, DBS; Vijay Shankar, head of transaction banking Asean, India and regional sales, ANZ; Farooq Siddiqi, global head of trade, Standard Chartered; Azim Walli, head of trade and supply chain finance products, Asia, MUFG


GTR: How is the Asia Pacific trade finance market performing in 2018?

Lee: It’s definitely much better than last year. Partly it’s driven by the fact that commodity prices have gone up. From a competitive landscape perspective, it’s still very intense in terms of pricing levels. As much as we would have thought it would be easy going up, it’s still very intensively competitive. There are a lot of banks still going after the same deals. But generally, the outlook seems to be much better than before, and hopefully that will go on.

Walli: We too have seen that in the last 12 months volumes and values per ticket have gone up. It’s been quite positive.

Siddiqi: Looking at it through a slightly different lens, we have seen the emergence of a lot of domestic trade, so for banks who are deep domestically in many markets, such as India, China, Indonesia, we see domestic trade picking up quite a bit. We are seeing quite a bit happening with new industries such as fintech, high-tech and electric vehicles. You will see new industries creating incremental opportunity which goes beyond just talking of commodities. In the SME space there is actually a big resurgence of export demand, which still, despite all the rhetoric of the trade tensions, we see holding up quite strongly.


GTR: What’s driving that demand?

Siddiqi: Demand is still good. The flows coming out of the US and Europe are still strong. You are seeing a lot more SME participation in the economies. It’s a bit of a slow burn, but you see them coming in a lot more mainstream. Also, a lot of the local and regional banks have been targeting SMEs as a source of growth. Plus you will see a lot of regulatory support to drive export business in those segments.

Walli: I would agree. In addition to intra-Asia trade, there is also domestic consumption, and those of us that have footprints in some of these domestic markets can benefit from that. We, for instance, have strategic partnerships with banks in Indonesia, Thailand, Vietnam and the Philippines, and you can leverage a lot of that domestic trade and intra-Asian trade. So, the reliance on the western economies and those supply chains has been replaced in the last 12 months, at least from a volume perspective.

Jain: Thematically, I’m pretty much in alignment with everybody else. We’ve had a fantastic start to 2018. Buoyant commodities markets have helped, as well as the fact that Asia remains very much an investment destination of choice for our global clients. Equally, the relative strengthening of the dollar has helped sustain export flows as well.

However, as strong as the first half has been, I’m probably more concerned than some of my counterparts here about the second half. I have seen export volumes drop off over the last few months on the back of trade tensions. I have equally seen a softening of investment spend, which is going to start impacting import flows. And in China we have seen recent reserve requirement ratio cuts that have placed excess liquidity into the market. This is going to impact margins in the foreseeable future.

Blyth: I would echo that as well. The macroeconomic fundamentals are much better than they were last year, and we see them improving. We see trade growing again, faster than GDP, so that’s positive, but I would say that it’s still quite fragile, and we are seeing that sort of product mix change. Asia is definitely the bright spot.

Jain: In markets that have traditionally been more domestically driven such as India, we see incremental capital expenditure being pushed to suppliers, large corporates tapping capital markets or offshore markets for money and, interestingly, mutual funds coming in as a new avenue for short-term trade loans. So, beyond the thematic of a broader export-led slowdown, there are a new set of market dynamics emerging which mean, again, I’m probably a bit more cautious.

Shankar: We have seen a good uptick in the unfunded part of trade. On the back of the trade, there are a lot of commodity hedging opportunities. You can see that all round from banks’ financial reserves, there will probably be a couple of quarters where the trading revenue and hedging revenues are picking up part of that volatility. In terms of trade for this year, we should be finishing much stronger than in the past, and margins have picked up to some extent.

Fehr: For us, we had a strong asset flow in the first half, but then the margin has been the issue for us. Contingent liability growth has been very good, but we are watching the second half very closely, because there are a lot of uncertainties in the market.


GTR: How worried are you that this positivity is not going to last?

Shankar: From what we hear from clients in the last month, we think they’re not unduly worried about it. The supply chains are not unduly worried about the US-China headline news. The supply chains do get rebalanced to South America, to Asean and so on and so forth, so goods may not now have a label of Made in China, they will have a label of Made in Cambodia.

Fehr: We’ve seen as a result of the tightening in Chinese ports on, let’s say, grains or whatever that are shipped from the US, that supply chains opened up literally within days or just a few weeks, and we’ve seen products coming out of the Ukraine which before came out of the US.

Blyth: This demonstrates the agility and the disruption of supply chains.

Siddiqi: I don’t think that’s the full story. We are only talking about commodity players and that’s the one that you will see. If you take companies that have integrated supply chains, you can’t move a manufacturing facility tomorrow.

Blyth: Disruption is yet to come.

Siddiqi: It’s yet to come. What could happen is the different segments would probably play it differently. For the big commodity guys, it’s very easy for them to switch. You can go to Brazil, or you’ve got people who have got spare capacity in Mexico and some of the big Chinese names will start exporting out of Mexico. The full story is still to play out for those guys who will have to think in the medium term what do they do with their investment decisions.

Walli: In the short term, I am mildly optimistic. If these western policies – Brexit, the US-China trade war – continue in the longer term, people are going to have to readjust. So where you source and manufacture from, but also to Farooq’s point, if you look at the auto industry, the global supply chains are so sophisticated and intertwined that to unwind all of that is a mammoth task. So time is going to be the biggest factor here.


GTR: I’m speaking to a lot of commodity traders and while you talk about how easy it is for them to switch suppliers, they are still very concerned.

Walli: There is ultimately always going to be a trickle-down effect. The supply chains are so intertwined that you’re going to get affected at some point.

Lee: The ones that will be hit the most will be the smaller players. It depends on your portfolio. If you have a portfolio that is also quite reliant on SMEs, then you will see a big change in terms of where your trade business is.

Jain: We are talking about supply chain integration and agility, but the reality is that almost independent of where you are in that spectrum, the dependence on China is significant. And so any slowdown in China will have a highly-correlated impact on most Asian economies. There is, to your point, a period of time that we will see things settle through. But, near-term, everybody is going to catch a cold.

Fehr: Just staying on that supply chain topic, we talked to a couple of our retail clients who are part of very large supply chain programmes and there seems to be a new dynamic coming from millennials. There is a change in consumer habits, and the product cycle is shortening, so there is a huge pressure to be faster in the supply chain than previously before, and that’s all down to the millennials. If something is on Instagram, you need to have that product available, and so there is huge pressure on the retail sector. I don’t know whether you see this, but from a US into Asia angle, there is definitely a movement to innovate in that space, from the banks and from the client perspective as well.

Blyth: This time next year we will be talking about supply chain disruption and the impact of policy change and tech advances. Those three confluences when they come together: you’ll see the curve jump.


GTR: Given you mentioned that everybody will catch a cold, maybe the conclusion that some would jump to is that US banks would be perhaps more exposed to this. Is that the case?

Fehr: From our perspective, we are still a small international player. Looking at the real global trade banks around the table I would think the impact would be greater on them. Our international footprint is relatively small, so we are concerned but maybe less concerned.

Lee: There will be some impact definitely for us, but again we also do a lot of intra-regional trade. That will be able to reduce some of the impact but I wouldn’t say all of it.

Evers Cai: Everyone talks about the trade war, but it’s really political and not necessarily an economic issue: it will be resolved politically. It’s the uncertainty that people are talking about and whether that’s going to affect the supply chains. Trade is a negotiating tool in this. China’s government is aware that if there are trade tariffs it’s definitely going to affect them. One way or the other, they are going to do something about it, possibly opening capital markets. I don’t think it’s going to be a really bad trade war, which is where definitely everybody will catch a cold. It’s definitely not in China’s interests for that to happen.


GTR: You’re in Beijing, Yongmei. When you speak to exporters and banks in China, what are people saying there?

Evers Cai: We haven’t actually heard very negative talk from people around us, and we see business as usual. People just think it’s more political than anything else. =The issue is that you have to also link it to the currency war. It is really a delicate balance for China’s government to try to find a way. That is why it takes time.

Siddiqi: I don’t think uniformly you have a clear winner or loser. In all of this you’re going to see some winners and losers. In Asia, one big thing going for us is infrastructure. We can talk about Belt and Road, but the reality is that in the short term it’s not going to substitute the US in terms of its impact on Asia. It wouldn’t have a massive impact in opening up and having a multiplier effect in the economy and opening up other opportunities which we don’t see.


GTR: We are still going to see trends like urbanisation, but if you’re an infrastructure investor, someone who is looking to invest in a project, is this the right time to be doing that, given the uncertainty?

Siddiqi: China’s Greater Bay Area is a good example of promoting local industries, primarily meant for local consumption. So, yes, you can always argue, where is the funding going to come from? But that project is primarily servicing the domestic economy, it’s not set up as an export venture. So it’ll depend on the type of infrastructure that you are talking about.

Jain: In the short term it’s more lose-lose. I have seen shine come off the Belt and Road, for example, and part of that is simply nervousness amongst participants around a perception of taking sides. Probably more than that, it’s that many are focused on working through managing uncertainty over the next few months before thinking about the next 15 to 25 years, even though everyone knows these projects have a strategic and positive impact.

Lit: When we talk to corporates, they say that they have not felt the full impact yet, as they are still fulfilling the past orders secured prior to the trade war. However, the prolonged uncertainty is not good. If anything, it will affect business sentiment and the market will tend to hold back investments. That’s when the full impact will kick in. With statistics showing that the trade deficit between US and China is continuing to widen, I’m not sure whether the level of this trade war will be elevated further.