As the Chinese government and others work to contain the threat of Covid-19 – the deadly strain of coronavirus that has spread across China and around the world since the turn of the year – players in the trade finance ecosystem have started to act.
HSBC is one bank to have identified the threat, announcing on Sunday that it would provide more than HK$30bn (US$3.9bn) in liquidity relief for businesses in Hong Kong, including cash flow support for trade finance customers.
In a statement, the bank says: “Trade finance customers can apply to convert part of their available trade loan facility into an overdraft facility of up to HK$10mn for six months to help them meet daily operational needs such as employee payroll and rental.”
Meanwhile, United Overseas Bank (UOB) has said it will help companies in Singapore handle the coronavirus fallout, especially small and medium-sized enterprises (SMEs), by providing S$3bn (US$2.2bn) for near-term liquidity needs.
This follows major disruptions to global trade, with the Chinese government imposing emergency measures, such as cutting off transport links from major cities such as Wuhan – understood to be ground zero for Covid-19 – and encouraging workers to stay at home.
Supply chains have invariably been affected by idling factories, with the automotive industry, which is a major industry in Wuhan, in particular feeling the cease in production.
Carlos Casanova, an economist at credit insurance provider Coface, says in a recent report that, “in terms of sectors, most of the risk is concentrated in the automotive sector”, with 10% of production located in Wuhan. Around 350,000 units of vehicle production in China will be lost in the first quarter of the year, research conducted by IHS Markit claims.
The impact is being felt across the globe, with European companies fretting they might need to shut down production in the coming weeks. Nissan has become the latest firm to close a factory, a site in Japan, because it’s lacking parts from China.
But Casanova tells GTR that other sectors such as electronics and machinery are vulnerable as well.
It’s believed Apple is one major global company at risk, with TrendForce, a technology market research firm in Taiwan, predicting that iPhone production could drop by 10% in the first three months of the year.
Logistical, supply chain issues such as these are already leading to legal complications in trade, Andrew Rigden Green, a partner at law firm Stephenson Harwood, tells GTR: “One area that I’ve been advising on has been where underlying sale contracts have been suspended or terminated by reason of a force majeure call by one of the parties.”
Force majeure, a legal term written into business contracts, can be invoked by parties if they’re unable to perform their contractual obligations due to a major and unforeseeable event, such as a natural disaster or terror attack.
Several Chinese companies have been claiming this in the past fortnight. They say that the coronavirus – and the ensuing clampdown on the movement of people and goods – amounts to a force majeure event.
According to the Financial Times, copper traders have declared force majeure and requested that miners in Chile and Nigeria delay or even cancel shipments.
Meanwhile, a Chinese government trade body has said it will provide force majeure certificates to local companies who are unable to meet their contractual obligations.
The China Council for the Promotion of International Trade (CCPIT) issued its first force majeure document to an auto parts manufacturer based in Zhejiang Province, which had been unable to supply parts to a Peugeot factory in Africa.
But such certificates aren’t necessarily legally effective in all circumstances, Rigden Green says: “A lot of the contracts within the international trade sector are either governed by English or another common law system. In particular the transport contracts and the documents of title, where force majeure is uniquely a question of contract, compared with civil law systems where it is a legal concept.”
He adds: “There may therefore be a situation where goods are being bought and sold by Chinese parties who will have a completely different understanding of force majeure from their international counterparts.”
Trade finance issues
Rigden Green says the trade finance sector may face issues as well, should the virus continue to disrupt supply chains: “As of yet there’s no huge immediate impact. But what will happen if this goes on for a long period of time, or the banks in China continue to be closed, or the correspondent banks are unable to issue export letters of credit in relation to certain sales? Then there could be failures in the trade finance chain.”
For instance, he explains that a failure in the sale contract could lead to an undrawn letter of credit, or a delay under the shipping contract – potentially due to a quarantine issue – could lead to a bill of lading being issued after the expiry of the letter of credit.
“A Chinese bank may be closed longer than expected and relevant export letters of credit may not be issued in time to meet requirements to pay for goods,” he adds.
What’s more, Rigden Green says banks holding bills of lading as security may suddenly find they are the owners of large quantities of commodities like soybeans or iron ore if traders go bust because of disruptions, delays and cancellations.
He adds that this could lead to problems: “Banks may have to locate these goods and take delivery to sell to mitigate their losses. Only, tracing these cargoes can often be difficult. Cargoes may have been delivered without presentation of the original bills, goods may have been co-mingled or may have been manufactured into a new product. Suddenly a bank’s security doesn’t look so good anymore.”
While economists may differ on the precise numbers, they widely agree that coronavirus will take its toll on Chinese GDP and weaken the global economy in turn.
Euler Hermes says it expects manufacturing and trade recessions to continue, with Oxford Economics also commenting in a report: “There had been signs the worst was over for both world trade and the global manufacturing sector. However, this tentative optimism has been dashed by the current disruption.”
Pointing to supply chain issues, as well as weaker Chinese imports and tourisms, the analysts at Oxford Economics have lowered their global GDP forecast for 2020 from 2.5% to 2.3%, down from 2.6% in 2019, making it the weakest annual expansion since 2009.
It says the Asia Pacific region will feel the economic fallout acutely, adding: “The shock will exacerbate the ongoing slowdown in the US and may result in the eurozone economy barely expanding at all for a second quarter running in Q1.”