Filling the Gap for Asian Trade Finance

In January, for example, Reuters’ Wayne Arnold said his personal view was that “Asia might not be able to count on another influx of cheap US dollars” for funding, after European and US banks pulled US$87bn from the region in the third quarter of last year and the trend looked set to continue.

In February the World Bank forecast slower growth and said it looked like trade finance was getting tight. And in March, the Monetary Authority of Singapore managing director Ravi Menon said, “towards the end of 2011, there was a discernible pullback in trade finance, project finance, and syndicated loans by several eurozone banks.” He added: “Deleveraging by eurozone banks is far from over. At the same time, the capacity of Asian banks to fill the trade financing gap is limited.”

Despite the dire predictions and even though there may still be “more demand than supply”, as DBS head of transaction banking, Tom McCabe, told the Straits Times recently, trade finance seems to be in a better position than many people expected in 2012. Simon Constantinides from HSBC told CNBC in late March that “there’s a lot of growth opportunity in the local banks to finance the local traders. We have seen some of the capital retrenched back to Europe. But companies are not struggling to find trade finance. There’s a healthy supply of trade finance in the market, which is actually making it very competitive for banks.”

Similarly, Citi managing director for global transaction services, Ravi Saxena, recently told Asian Banking & Finance that while there was a US dollar liquidity shortage in the fourth quarter last year, “now, liquidity is actually coming back into the system.”

The pullback by European banks and the alternatives for trade finance may actually have opened up new opportunities for other players. Local banks, as well as a few multinationals such as HSBC, could step into the gap. As Constantinides said, his bank has taken full advantage of the opportunity and some Asian banks with high ratings are also filling the gap. Some local banks may also have sourced deposits from American or other corporates that are flush with cash to help fund their trade finance initiatives.

Corporates themselves could step in as well. US corporates have about US$1.2 trillion in cash, according to Moody’s, and about US$700bn of that is overseas. Along with placing some of it in local institutions, the companies could put their money to work by funding their trading partners. Bank of America’s Bruce Proctor told gtnews, for example, that companies with large amounts of cash on their balance sheet were beginning to “set up a framework for a buyer-centric financing”.

New non-bank players are also looking at entering the market. In Europe, gtnews contributing editor Enrico Camerinelli said companies such asTaulia and Corporate LinX are “providing supply chain finance [SCF] services directly to the small to medium-sized enterprise [SME] sector, potentially establishing long-term client relationships, which those banks may one day wish they had not spurned.” Similar companies may well start moving into Asia.

And renminbi (RMB)-based trade finance, while still small, could gradually offer yet another liquidity pool. The A$30bn swap between Australia and China announced last month, for example, enables “increasing opportunities available to settle trade between the two countries in Chinese RMB,” according to the Reserve Bank of Australia (RBA).

While the outlook for trade finance may have looked bleak in 2011 and in the first part of the year and could still be a bit uncertain, the picture has brightened more recently and agile companies may even be able to take advantage of potential gaps to gain competitive advantage.

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