Demand for trade is back. Market players are bullish that trade volumes in emerging economies will rise significantly over the next six months, led by activity in Greater China and the Middle East, according to HSBC's first half trade confidence index.
"Most respondents were extremely or moderately positive about trade," said Christopher Lewis, head of trade and supply chain for Greater China at HSBC, during a press conference. "What is driving the positive outlook among traders? Demand."
The index found that 50% of Chinese traders and 52% of those in the Middle East expect trade volumes to increase "significantly" in the next six months. Overall, confidence among the 5,120 exporters and importers from 17 countries surveyed for the index rose to 116 from 110 in the second half of 2009 (100 = neutral).
Actual trade numbers back up the improving sentiment. According to Standard Chartered Bank's latest market trends in trade report, the total value of trade was $181.4 billion in February, a 45.2% year-on-year increase over the same month a year earlier. Export values rose 45.7% and imports 44.7%.
But trade volumes are not increasing across the board. "The axis of trade momentum has clearly shifted to the emerging markets, where the rebound in trade, fuelled by intra-regional activity, continues to boost global economic recovery," said Simon Constantinides, head of trade and supply chain for Asia-Pacific ex-Greater China at HSBC, in a statement.
Lewis added: "International trade is no longer being led by the US and Europe and our respondents say this will continue."
Karen Fawcett, group head of transaction banking at Standard Chartered, reiterated this view in an interview with FinanceAsia last month when she said that the bank was seeing a lot of growth in intra-emerging market trade flows.
Demand for trade finance is also rising. According to the index, 48% of traders in India and 44% of those in Southeast Asia expect to significantly increase their need for trade finance in the coming six-months. Constantinides added that the majority of companies that need to finance their imports and exports will look to banks as their source of funding.
"We need more trade finance today compared to two or three years ago," said one trader in Southeast Asia whose company trades in commodities. They said that in late-2008 and early-2009 their demand for financing fell because volumes were down, but that volumes have since recovered and are in fact higher now than they were pre-credit crunch. A fact the trader attributed to Asia's rapid economic turn around and positive outlook.
"We expect volumes in Asia to continue to rise," the trader concluded.
Other institutions also see an increase in demand for trade credit. "In 2010, we're seeing robust growth in demand for trade finance," said Ashutosh Kumar, global head of trade product at Standard Chartered. "While there are specific geographies where demand for trade finance is up, I think there is generally broad based growth across Asia."
"Trade finance activity in India is showing visible signs of an uptrend, fuelled largely by the significant investments underway in the country's infrastructure space, for example in power, telecom, roads and ports," said Rajiv Jain, head of treasury services for India and South Asia at J.P. Morgan. He added that exports from the country rose 50% year-on-year to $20 billion in March.
Getting the banks to talk about how they are responding to the increased demand isn't easy. Lewis would not provide specifics on how HSBC was moving to increase its trade finance offering in India and Southeast Asia, except to say that the bank had "already beefed up" in the markets and would continue to support them. Kumar said Standard Chartered already had the necessary infrastructure in place and was "always" ready to provide more services to clients where they demanded it.
Uncertainty over renminbi revaluation and protectionism were two dark clouds in HSBC's index. Out of all the China traders surveyed, 66% were either neutral or expect changes in the county's peg to the US dollar to negatively impact trade volumes; 80% of traders in Hong Kong expressed similar sentiments.
"In China, the single greatest factor to impact trade confidence is the uncertainty over exchange rates," said Lewis. He added that HSBC expects the renminbi to appreciate as much as 5% against the US dollar over the next three years and that the fact "weighs heavily on the minds of traders".
One programme that could counteract the appreciation of the Chinese currency is the renminbi trade settlement pilot programme that was launched last summer. As the yuan appreciates, exports become more expensive and potentially negatively impact manufacturers; by settling transactions directly in renminbi, transactions no longer need to be conducted in US dollars -- the predominant currency of international trade -- reducing costs and uncertainty around the exchange rate.
Banks are preparing for a more international renminbi. In March, Bank of America Merrill Lynch joined the People's Bank of China programme and HSBC launched current accounts in the currency. Other institutions, including CIMB, DBS and Standard Chartered, also offer the service.
In terms of protectionism, only 8% of traders in Greater China said they expect it to negatively impact their business. However, as Lewis said at the press conference, the concerns are "still there" and remain an issue in some countries.
HSBC launched the trade confidence index last year in the wake of the global credit crunch as a way to gauge global trade sentiment.