How times have changed. Not so long ago awash with liquidity, many mainland China’s companies now find themselves operating in a very different environment in the aftermath of the global financial crisis. Flanked by liquidity-strapped suppliers on the one side and customers on the other, the upshot has been greater demand for supply chain finance as liquidity conditions bite. In particular, trade finance banks report significant uptake in cross-border supplier finance and cross-border receivables finance solutions.
“With the renminbi appreciating, and given widespread expectations that it will further appreciate, and with the government and central bank tightening onshore lending, the cost of funds is increasing in dollars,” said Ravi Saxena, head of trade Asia-Pacific, at Citi global transaction services (GTS). “If you put it all together, trade finance is very relevant for China, and as an international bank we are seeing lots and lots of trade finance activity, both in renminbi and dollars, from both Chinese and multinational corporation (MNC) clients.”
Aside from addressing their credit and funding needs, mainland firms are showing greater appreciation of the multiple benefits of supply chain finance, especially for its ability to ease working capital and mitigate buyer risk. “Most of the growth in supply chain finance volumes is coming from supplier finance-confirmed payables and account receivables,” said Shivkumar Seerapu, Deutsche Bank’s global product head, financial supply chain, global transaction banking. “Both corporates and banks find these the easiest to implement and understand, especially on the corporate side, and the quickest to get done.”
But how Chinese firms will respond to this new liquidity environment in the mid-to-longer term is less clear. During recent years, there has been a trend for mainland companies to focus more on bank technology platforms and expertise when awarding mandates, as is the case with many developed market firms. But some international banks, with their expensively acquired technology platforms, fear that some firms may revert to a time when their only real consideration was how much credit was available and to how many suppliers.
Thus far, there is little sign of this trend developing, with banks reporting across the board growth in demand for supply chain financing both domestically and cross-border. “With the continually booming Chinese market, we are seeing more and more domestic needs that are in line with China’s drive to advance local infrastructure,” noted Bruce Alter, head of trade and supply chain, China at HSBC.
Citi has doubled its trade finance revenues in the last three years across Asia including in China, and the bank doesn’t expect any change in trajectory. Likewise J.P. Morgan, which recorded double-digit growth for trade finance in the mainland last year, and expects similar growth in 2011. “Companies across China are looking to enhance their liquidity, largely as a result of a better understanding of the importance of cash flow and balance sheet management,” said Kao Fang Ming, J.P. Morgan’s head of trade finance, China. “For example, Chinese companies are increasingly transacting business with offshore counterparties on an open account basis. By providing Chinese companies with funds based on the buyer’s ability to pay, it provides domestic Chinese enterprises with certainty in terms of their cash flows and reduces their receivables risk.”
Inflation bites
It is not all plain sailing though. As Chinese regulators battle to keep inflation in check and staunch liquidity, foreign-funded banks have come into their sites. Mainland authorities have tweaked onshore renminbi lending to companies so that both domestic and foreign-funded banks are covered by a new quota system as of January this year, rather than just local operators. In addition, these quotas will be assessed individually based on a series of indicators including a bank’s loan book growth, rather than being given out en masse.
It remains to be seen how this move will affect the market. If the system is more successful than previous efforts, and that is a big if, credit availability will be reduced and cost more. But for the system to work, will larger lending banks be given larger quotas?
Bankers also expect to see an increasing number of large deals being syndicated by groups of banks in China, as they seek to make their renminbi quota go further. Banks will also have to be very selective as to which clients they are prepared to extend this precious quota, and come up with more innovative and effective working capital solutions.
The biggest impact may be felt by domestic banks whose lending is overwhelmingly dominated in local currency, and whose capability to lend should therefore be most heavily restricted. International banks will likewise be restricted from onshore lending in renminbi, but can still address lending needs for clients that have both dollar and renminbi financing requirements. They may even pick up extra business. “Where regulation and business permit, banks can compensate on the dollar side to make up for the shortfall on the renminbi side,” said Deutsche Bank’s Seerapu.
Global banks say they are broadly sanguine regarding any impact from the new quota. Locally-incorporated foreign-funded banks that have a higher percentage of their trade finance business denominated in renminbi will be harder hit than those that do not. But any reduction in onshore renminbi lending can be made up for in other areas. For example, lending to financial institutions (FI) and non-bank FI clients, such as insurance companies, is exempt from the quota, so expect banks to focus on these clients. “From a strategic perspective, we continue to see business opportunities and envisage that the reduction in lending volumes will be compensated for by increased margins as well as our well established FI trade business,” said Seerapu. “Also, we expect business to increase on an organic growth basis as underlying fundamentals in China are very positive.”
This story was first published in the Trade Finance Yearbooksupplement to the April 2011 issue of FinanceAsia magazine.
