Published: November 01, 2011
What role does trade play in the global economy?
During, and certainly since the financial crisis, economists and politicians alike have increasingly recognised that trade is instrumental in driving the global economy. Trade levels fell by 12.9% in 2009, immediately following the crisis, but in 2010, these figures bounced back with an increase of 14.5%, leading to an economic recovery in many regions. We saw varied growth levels across the regions; for example, in Asia, exports grew a great deal faster than in the west, and China in particular saw exports expand by 28%, double the global rate of growth.
The right trade finance solutions can be an essential catalyst for growth.
Over the past 20 years, average global growth rates have been around 6%, which we would expect to see this year, despite the serious economic challenges in Europe and the United States. Asia is again expected to contribute in a big way to this growth, and with intra-Asia trade now exceeding 50%, much of this growth is self-sustaining, without being significantly affected by the prospect of further economic instability in the west. New trade corridors are becoming more important too, such as between Asia and Latin America, and Asia and Africa.
What is the importance of trade finance in this context, particularly supply chain finance?
Trade finance underpins all global trade and the right trade finance solutions can be an essential catalyst for growth. These solutions are as diverse as the companies they support. For example, an apparel manufacturer in Bangladesh sourcing textiles may require pre- or post-shipment finance. In Africa, our structured agrifinance solutions enable groups of farmers who would find it difficult to source financing individually to access input financing for seeds, fertilisers, pesticides, etc. with insurance to cover crop loss or damage. While some of these solutions are familiar, others such as agrifinance are fuelling enterprise in new ways.
In addition, we are seeing a huge increase in supply chain finance programmes. Supply chain finance rose to prominence during the crisis as companies sought to accelerate their cash flow cycle and maintain working capital, but they recognised that simply extending payment terms would compromise their suppliers. Programmes include not only immediate suppliers but also secondary and tertiary level suppliers. Consequently, in some regions, supply chain finance is experiencing double or even triple digit growth. These programmes are supporting not only cross-border trade but domestic trade as well. For example, while China used to be seen as the world’s assembler, it has fast become the world’s manufacturer. While companies in China used to source components from overseas, these are now manufactured within the country, leading to significant expansion of domestic supply chains.
In 2010, while trade improved, liquidity remained a challenge, as it does today, so the focus on supply chain finance has remained as companies recognise the long-term competitive advantages of a robust supply chain combined with the working capital benefits of longer payment terms. Other forms of trade finance have expanded too, but the key is that these solutions are client-driven, to meet specific operational and strategic objectives.
You mention China: what is the impact of RMB liberalisation likely to be on world trade?
The use of RMB for trade settlement is growing exponentially. By mid-year 2011, RMB cross-border trade had reached 10% of trade volumes ($1.7tr) from less than 1% 18 months ago (source: People’s Bank of China). The RMB is rapidly becoming the trade currency of choice for Chinese exporters and importers to avoid foreign currency exposures and increase convenience. RMB-settled trade is also easier from an administrative perspective. For example, trade transactions — settled in RMB — under 90 days are now simpler to process. In addition, RMB transactions have fewer documentation requirements for tax refunds. Consequently, we are seeing clients from all regions becoming excited about the opportunity to do business in RMB, and there remains significant competitive advantage in doing so.
How is Standard Chartered facilitating these trends?
We recognised that as a bank, we need to support all aspects of our clients’ financial requirements, which includes trade just as much as cash. The depth of relationships that we maintain means that we are integrated with our clients’ daily operational activities and strategic vision, so developing a significant trade business was a logical process for the bank and highly desirable for our clients.[[[PAGE]]]
Standard Chartered started as a trade bank 150 years ago. We have built a substantial trade finance infrastructure far earlier than many banks, which has resulted in Standard Chartered maintaining our position as a leading trade bank. In 2007, we set up our Trade Asset Management Team to enhance our trade finance capacity as we recognised that trade was set to grow and Basel II was going to be implemented in 2008, which would add greater pressure on banks due to regulatory capital implications. In November 2007, we closed the first synthetic securitisation of trade finance loans, which represented a major landmark for the bank, our clients and the wider investor community, and gave us a significantly greater capacity for client business.
The use of RMB for trade settlement is growing exponentially.
In 2009, at the height of the crisis, we set up a new $1.25bn programme in partnership with the IFC to bring liquidity to the market and facilitate export and import activity. Under the Global Trade Liquidity Programme, for every $1 provided by the IFC, Standard Chartered matched with $1.50. This programme encompassed a wide range of activities, including financing other banks that would use this money for trade finance purposes.
This commitment to facilitating trade is an ongoing strategic objective for Standard Chartered. For example, in Asia, there is considerable momentum in infrastructure development, such as mobile technology, as countries implement new technology or migrate from 2G to 3G or 3G to 3.5G. We are a major player in supporting these developments, and anticipate a long-term trend in this direction.
How does an integrated approach to cash and trade contribute to clients’ working capital objectives?
Banks need to recognise that cash and trade are integral to each other, which therefore need to be reflected in the products and services they offer. Even though cash and trade may be managed by different areas within a client organisation, there are some situations in which they are treated with consideration of each other. There are huge working capital improvements that can be derived from an integrated approach, as well as operational advantages of more streamlined, simplified processes. For example, a company may choose to finance its receivables. The quicker this can be done once a sale has been concluded, the more immediate the cash management benefits. Similarly, once the customer has paid an invoice, the cash needs to be received as quickly as possible into the account to reduce days sales outstanding (DSO) and posted against customer accounts to free up customer credit limits and enable more business. If the bank has a view of both ends of the transaction, they can add more value to the client from a working capital perspective.
What is the impact of Basel III likely to be on trade finance, as the regulation is currently drafted?
According to our estimates, we believe that pricing could change by between 20-40% globally if Basel III is implemented in its current form, with an overall 6% fall in trade finance capacity across the banking community. The greatest impact of this is likely to be on small and medium-sized enterprises, particularly those in emerging markets. Even if there are changes made, Basel III will compel banks to move beyond a product focus to a more holistic view of client relationships. By establishing an end-to-end view of a client’s business, they can gain a full understanding of risk and find ways to facilitate the entire trade and cash management cycle.
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