For a clear indication of how the global economy is evolving, look no further than changing global trade patterns. The total value of trade from Brazil, Russia, India and China, better known as the Bric countries, grew by 40% year-on-year in the second quarter of 2010, compared to just 20% in the Organisation of Economic Co-operation and Development (OECD), according to Standard Chartered. Mainland China, meanwhile, succeeded the US as Brazil’s largest trading partner in 2009 and Africa’s last year.
These trade flows are underpinned by a massive increase in gross domestic product (GDP) from the Bric countries, which is set to rise to about $18 trillion during the next five years, from $9 trillion, according to South Africa-based Standard Bank, which itself is 20% owned by giant Industrial and Commercial Bank of China (ICBC). Fast developing intra-regional flows, growing domestic trade to cater to an expanding middle class, and the renminbi trade settlement programme are providing new opportunities for trade financing for banks with the right capabilities in the right locations. Little wonder that Asia-Pacific banks have been some of the most vocal opponents to Basel III’s less trade-friendly features.
And these intra-regional trade flows are getting larger every year. Chinese trade with Africa has doubled every three years during the past 15 years, surpassing $100 billion in 2008. Today, China buys 10% of all of Africa’s exports, principally from Angola, South Africa, Sudan and Republic of Congo; about 70% of these exports consist of crude oil and 15% of raw materials. To put this in context, in 1990 no African country had trade with China worth more than 5% of its GDP. By 2008, this number had reached almost two dozen, with more than half listing China as one of their top five biggest trade partners.
For trade finance bankers, this means big business. Large contractual financing arrangements, including some structured financing, prepayments and hedging for currency or interest rate risk, are becoming more common for larger scale deals, often on the back of commodity flows, according to Standard Bank. Moreover, the China-Africa bilateral trade relationship will reach $300 billion by 2015, doubling 2010’s trade volume of $150 billion, and mainland investment in Africa will surge to $50 billion by 2015, a 70% increase compared with 2009. “The appetite for raw materials in China is driven by the growth of the Chinese economy. So as long as the Chinese economy is growing, there will always be a sustainable requirement for raw materials from the producing countries in Africa and elsewhere. Be that oil and coal for power, iron ore for the automotive industry, or copper for the electronics industry,” said Seorus Simpson, director, debt products group, Asia for Standard Bank.
This growth in intra-regional and intra-Asian trade has been accompanied by increasing internal trade. The unreliability of demand from developed economies has encouraged emerging countries to regard domestic consumption as a means for stable and sustainable growth. “China’s trade growth is predominately driven by export-led growth, but I believe that domestic trade is as big as exports in China’s growth story,” said Standard Chartered’s Ashutosh Kumar, global head, local corporate products and receivables.
First Bric, now Chime
If Bric has become a household word since it was coined back in 2001, expect Chime (for China, India and Middle East) to do likewise. Standard Chartered, for example, predicts that trade between China and the Middle East and North Africa (Mena) will grow at a compound annual growth rate of almost 14% by 2030, and between India and Mena by more than 16%. “The Chime corridor, the Silk road to Asia with the Gulf Cooperation Council countries, growing trade flows with Latin America, Africa and Russia will see exponential growth in the trade flows running individually with each corridor in excess of hundreds of billion dollars by 2020,” said Anand Pande, head of product management global transaction services (GTS), Asia-Pacific at Royal Bank of Scotland (RBS).
Free trade agreements are adding to the momentum. More than 50% of Indian trade is intra-Asian, compared to about 20% with Europe and 12% with North America. But the implementation of India’s free trade agreement in early 2010 with the Association of Southeast Asian Nations, for example, is expected to help double trade between the two entities to $100 billion from $50 billion within the next five years, according to a study by the Federation of Indian Chambers of Commerce and Industry. India’s trade relationship with China is also booming. “In India, huge investments are being made into the telecom and power sector,” said Yeo How Ngee, managing director of GTS at DBS. “Most of the capital, equipment and services required for these sectors are being provided by Chinese companies instead of the European or US companies.”
But as recent events show all too clearly, trade can be highly susceptible to international events. Current crises in Africa and the Middle East are pushing up light sweet crude oil prices to levels not seen since September 2008, thereby driving up the cost of moving goods. Meanwhile, Japan, which accounted for 17% of exports and 12% of imports within intra-Asia trade in 2010, is still reeling from last month’s earthquake and tsunami, and the extent of the economic effects remain unclear.
Restocking of depleted inventory after the global financial crisis, while more mundane, could also flatten the growth curve. “Growth in infrastructure- related spend, government spend, commodities and fast moving consumer goods, will continue to provide some support, unless something else goes wrong,” said Standard Chartered’s Kumar of this year’s trade prospects. “2011 should be a good year for trade, but it will depend to a great extent on how the various global crises play out and whether we have any more surprises. Countries such as Indonesia, Korea and China which export to Japan will be affected, so the disaster there will have near-term effects on trade.”
Despite a short-term hit, Asia-Pacific’s strong economic fundamentals, resource- hungry China and India, and growing trade with the Bric and Chime nations should see its trade through current global uncertainties.
This story was first published in the Trade Finance yearbook supplement to the April 2011 issue of FinanceAsia magazine.