Global trade tensions have not put the brakes on trade finance in Asia, with deal flow much improved on previous years.
Major players in the sector have said that while they are preparing for some disruption, the tariffs regime driven by the Trump administration has failed to dampen what has been a bumper year to date.
Rising commodity prices and increasing demand in consumer markets have helped resuscitate the sector. While pricing remains relatively flat, enquiries are up, new entrants are looking at the market and the mood on the ground is one of optimism.
“We haven’t seen any material changes in trade dynamics due to geopolitical reasons. While we are bracing for some volatility, we expect that to bring a rebalancing in flows, risk and pricing, rather than interruption or major disruption. Underlying demand remains strong, global economic indicators are trending well and while trade flows may take some new paths, we feel that overall volumes will sustain,” says Vivek Batra, regional head of transaction banking sales at MUFG Bank.
The US has introduced tariffs on metals including steel and aluminium. While originally expected to target the likes of China, Japan, South Korea and Vietnam, Trump surprisingly declined to exempt allies such as Canada, the EU and Mexico from levies on their exports.
Each of these jurisdictions is preparing retaliatory tariffs, while China has placed tariffs on key agricultural products from the US, such as sorghum and soy beans. Banks engaged in the funding of these specific trade flow may expect to take something of a hit. But for those funding intra-Asian trade, it could act as a boon.
“In terms of commodity finance deal flow, we’re seeing a lot of activity. We don’t see any slowdown, notwithstanding the threats. I work a lot with Asean countries, China and India. There’s still lots of demand and work there. Commodities are required so people will still do the deals. We expect to see deal volume continue this year at least,” Lishi Fong, a structured finance lawyer and of counsel at Norton Rose Fulbright in Singapore, tells GTR.
In Beijing, business continues as usual. Chinese exports showed resilience in April, growing by 12.9% year on year, following a surprise dip in March. Imports also beat forecasts, growing by 21.5% up from 14.4% the previous month.
Indeed, in the face (and perhaps because) of the relative uncertainty in the sector, new entrants are rocking up in China’s commodity finance market, with investors also willing to put their money into the country.
“Other players are sensing the opportunity, we see new companies coming in to fund in the space and to offer finance. Chinese producers are using this as an opportunity to see how they can do things differently. They’re looking at new structures and new markets and so far, we haven’t been affected,” says Yongmei Cai, trade finance partner at Simmons & Simmons in the Chinese capital.
Global trade grew by 4.8% last year, despite the fact that there were 489 new protectionist measures added by governments around the world (the majority in the US).
Trade finance markets in Asia have been buoyed by this rebound in global trade. While figures show that 2017 was a poor year for deal volume, many in the sector felt anecdotally better about it than they did 2015 or 2016, when low commodity prices acted as a depressing factor.
The energy and metals sectors, in particular, has been enjoying an upwards trend in prices and booming demand since mid-2016. Metals producers in China have steered their output away from the US, targeting domestic projects and exports to neighbouring nations.
“It is likely that in the short-term, US companies with local steel and aluminium production facilities will benefit, while the European steel sector may see a drop in the utilisation of their manufacturing assets. We expect the Chinese steel sector to be less impacted as they mainly focus on markets in Southeast Asia,” says Anthony van Vliet, global head of trade and commodity finance at ING.
And while the trade war continues to dominate many conversations in Asia’s trade finance teams, the mood is more curiosity than fear.
Mahamoud Islam, Asia Pacific economist at Euler Hermes, describes the situation as “trade games” rather than a fully-blown war, with actions to date designed to gain leverage
“We see these ‘trade games’ as a tool for negotiation. We don’t see an impact on trade flow for the moment,” he says, adding that China’s Belt and Road Initiative has the potential to act as a diversionary route for metals flows.
Perhaps a reflection of this sanguinity, banks have been increasing their exposure to China. According to Fitch Ratings, foreign banks’ mainland China exposure reached record highs in 2017 and is likely to rise again in 2018.
Hong Kong banks accounted for half of the global exposures, which in total rose by 16% in 2017. Banks in Singapore and Taiwan also became more exposed to China last year, amid positive growth projections and a more favourable operating environment.
Jonathan Cornish, head of Asia Pacific banks at Fitch, tells GTR that while he doesn’t expect the trade tensions to have a major impact on trade finance flows, banks may see their growth prospects diluted in China if the situation worsens.
“I don’t think it’s going to have too much of a bearing on banks. To the extent there are any trade implications, especially for China, it may curb some of the growth opportunities that banks in China or foreign banks looking to China might have, in terms of trade participation,” Cornish says.