While other lenders may be discouraged by the mounting costs and risk, the trade war will not cause two of Asia’s biggest trade finance banks to limit their lending into China.
Senior trade bankers from HSBC and Standard Chartered say that despite trade tensions between China and the US, they are fully committed to China, including strategic Chinese government programmes such as the Belt and Road Initiative (BRI) and Made in China 2025.
Both BRI and Made in China 2025, cornerstones of the Chinese Communist Party’s foreign and economic policy, were named as examples of Chinese malpractice by US vice-president Mike Pence last week, adding to the perception that dealing in either could be deemed risky business.
In response to questioning from GTR at an event in Hong Kong today (October 10), Standard Chartered’s head of transaction banking for China, David Koh, said the bank is “definitely going all in with BRI”.
Koh said he is not overly concerned by the bilateral tariff battle, saying that companies are more resilient than given credit for, and that the main concern should be sanctions, such as those slapped on Russian companies accused of cyber interference in the US in April this year.
“What would be a major disruption to supply chains – the biggest potential disruption –would be sanctions, which is a purely political risk, like what the US did with certain Russian companies earlier this year. That would be massive because so much of our business is done in US dollars around the region. But aside from that, tariffs are manageable,” he told Coface’s Country Risk Conference, held at the Hong Kong Banker’s Club.
Koh’s views were echoed by Inwha Huh, global head of structured trade solutions at HSBC, who also suggested that these two banks may be outliers when it comes to their commitment to funding Chinese trade.
“We have a similarly optimistic strategy on BRI. The sentiment from the overall bank market may not be as robust as Standard Chartered and HSBC. At a market level there’s [different] sentiment about projects in China, particularly local projects, and we’re seeing that from foreign banks. HSBC and Standard Chartered are probably more bullish than the foreign bank market,” Huh said, adding that she views BRI not as a “China only thing”, but as an outbound venture into the rest of Asia, which is fuelling growth around the region.
Both of these banks have been vocal cheerleaders for many of China’s policies, including its infrastructure drive and the internationalisation of its currency, the renminbi (Rmb).
Perhaps illustrative of the depth of their connections, today Standard Chartered announced that it is developing an internet of things-powered solution for bank financing and payments, along with Huawei. Huawei has been tipped by many as a likely victim of further US sanctions, due to its close ties with the Chinese government and intelligence agencies.
In August, the telecoms giant was banned from rolling out Australia’s 5G network, due to concerns over its connections with the Chinese intelligence services.
In general, banks in Asia Pacific are reckoning with a highly volatile situation. Even those who are not directly financing bilateral trade between the world’s two largest economy are expecting to experience some slowdown to their business, due to the widespread ramifications expected through supply chains.
Statistics from financial research firm Coalition show that trade finance banks in the region enjoyed strong growth over the first half of 2018. Trade tensions are set to act as a drag on revenue growth for the second half of this year and into 2019, however, with commodity prices also set to dip into the new year.
Many borrowers are beginning to factor in the long-term implications of a sustained trade war, with Chinese and international companies looking to shift their manufacturing bases out of China and into Southeast Asia. In the case of electronics companies, Vietnam is the destination of choice, while for companies in the automotive space, Thailand is the place to go.
William Marshall, Hong Kong-based trade lawyer and partner at Tiang & Co, says that clients are already approaching him to assist in restructuring their supply chains, after seeing substantial falls in the volumes of trade orders they’re receiving.
“Tariffs are eating into profit margins. Even Chinese companies are looking to move their manufacturing operations out of China into Southeast Asia,” he says.
Trade war begins to bite Chinese banks and companies
Smaller companies may not have the same choice, and this is one of the greatest challenges the Chinese government faces in attempting to manage the fallout of the trade war.
As well as facing potentially higher import costs, due to tariffs placed on vital components, small manufacturers are being starved of credit from China’s mainstream banking sector, while the crackdown on peer-to-peer lenders in the country will hit SMEs hardest too, compounding the issues.
“In the context of heightened uncertainty following from the trade tariffs, it is likely that Chinese banks have become more cautious about lending to SMEs, particularly if these are dependent on US imports or final demand,” said Carlos Casanova, Asia Pacific economist at insurance company Coface, in a phone interview this week. “SMEs are at present under-serviced by banks, and more reliant on shadow banking for their financing needs, which the central government has cracked down on since the start of 2018.”
People’s Bank of China (PBOC) statistics show that over the first half of 2018, lending to small businesses as a share of total lending in China fell from 30% to 20% – even before the first tariffs were imposed.
In response, the PBOC cut the reserve requirement ratio (RRR) by 100 basis points this week, with a view to injecting Rmb750bn into the banking system. This, in turn, creates pressure for banks to start lending again to small businesses, while simultaneously being directed to re-risk their balance sheets.
“The biggest direct impact on Chinese banks is whether the escalation in trade frictions would put further pressure on the authorities to loosen credit, and if yes, how banks are going to sustain enough capital to fund excessive balance sheet growth,” Grace Wu, head of China bank ratings at Fitch, tells GTR.
Resultantly, analysts are not expecting any real deleveraging this year or next in China, despite advice from the IMF and other multilateral agencies, which say that its debt levels are unsustainable.
Combined, China’s overheated real estate and inefficient construction sectors account for 50% of its corporate debt, but local government are under orders to issue Rmb1.35tn in debt issuances by the end of October, much of which will likely find its way into these sectors, according to Zhu Haibin, chief China economist at JP Morgan.
It all amounts to a messy, complex picture, with trade banks caught in the middle. Local lenders will likely have little choice but to follow top-down directives. HSBC and Standard Chartered have gone so big on China, there’s arguably no going back. But for banks taking in the situation from a less committed standpoint, the Chinese market will look significantly less attractive than it did one year ago.