Kicking off JP Morgan’s discussion at Sibos in Singapore about the multitude of new trade agreements and institutions in Asia, JP Morgan executive for global trade and loan products Pravin Advani said that trade growth has been below GDP growth over the past three years, which has created excess liquidity in the banking system. Regulations have also changed, with Basel III in particular increasing capital costs and with increased compliance requirements for KYC. The result has been lower demand, excess liquidity chasing assets and a decline in margins.
Amidst what might seem to be a gloomy environment, new agreements and initiatives are bringing optimism. The signing of the Trans-Pacific Partnership (TPP) has been a positive development that will lead to tariff reductions of about 90%, and China has launched its One Belt One Road (OBOR) initiative to restore land and trade routes. There is also about $162 billion of investment going into policy banks such as the Asian Infrastructure Investment Bank (AIIB), which will promote the development of infrastructure.
The TPP will be a game-changer
In the long term, JP Morgan executive director for global trade product management Mike Quinn said, TPP is a game-changer. Covering 12 countries, it is focused on tariff relief and trade practices, along with intellectual property rights, labour unions and the human side of trade. It is focused on extending free trade rules to a broader set of countries and the harmonisation of existing rules, he observed, since countries already have bilateral agreements.
Quinn noted, however, that it will take a couple years to get new tariffs in place and some tariffs have a fifteen year phase-out. Having legislatures involved means it takes time, and the question for the various countries is whether approval is quick or whether they struggle through ratification, depending on where they are going directionally. A number of countries on the sidelines may agree more quickly. “I’m optimistic it will get traction,” Quinn said.
OBOR creates infrastructure opportunities
OBOR has come at a time when the Chinese government is pushing companies to look beyond China and where else can they expand, said JP Morgan head of APAC trade sales Agatha Lee. The Silk Road has economic benefits including new markets and new industries, she said, which will create employment and social upgrading. State-owned enterprises, for example, are looking at building infrastructure such as railroads and ports, then subsequently building oil and gas and power as well as other manufacturing infrastructure.
“We think the intention is to collaborate,” she believes, and “there are benefits for people willing to participate. The test will be what comes out of it.”
China also wants to promote the renminbi (RMB), Advani added, so OBOR could be a way of internationalising the RMB, even though it won’t be just Chinese companies bidding for projects. Lee added that although one angle for financing is the policy banks, some Chinese companies may not have a bank to use overseas so there can be a role for international banks. The Silk Road initiative is massive, she said, with capital expenses for buying equipment and commodities likely to reach $2.5 trillion. “It can’t just be Chinese banks financing it.”
When asked whether there is a new model for financing driven from China, Lee said people are still looking for more information about the AIIB strategy and policies. Advani said the real question is, once somebody gets a contract, who will fund it? “If a Chinese company wins it, they will go to a Chinese bank.” That said, Lee expects that international banks can participate. “There could be situations in a large project where international banks take part in a syndicate of banks. It depends how AIIB decides to function.”
TPP, OBOR and the ASEAN economic community (AEC) all at the same time?
While these various initiatives are happening concurrently, Lee said there is no intention to time all of them together. That said, OBOR is rebranding the Silk Road, the ASEAN agenda is to boost economic growth and some ASEAN economies are part of TPP. While they are separate initiatives, she observed, flows will be integrated since they all “top up” together.
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