There were a number of major developments in 2010 that affected trade finance in Asia, including renminbi reform, new Basel rules and growing intra-Asian and global trade flows, to name but a few. What is your assessment of the year?
Asia has this year consolidated its reputation as the world’s engine room for growth. Emerging from the financial crisis in excellent economic shape, particularly when compared with the still embattled US and European markets, Asia played host to a resurgent trade finance sector, with rapidly growing intra-Asian trade flows indicative of a wholesale return of confidence – at least at home. Generally speaking, the year has been a good one for the industry, and we’re quietly confident that 2011 will be even better.
While the past year was a year of many highlights, one of the most significant shifts – at least symbolically – came with the mid-year announcement by the People’s Bank of China regarding the expansion of the international trade settlement program, a key step in Beijing’s long-term internationalisation of the renminbi. Although the program is still in its formative stages, trade settlement in renminbi is growing quickly, with corporates and financial institutions globally now actively incorporating the renminbi into their respective operations. Russia and China are already discussing a bilateral trade agreement that involves settling trade in their local currency, so we may see further similar discussions between China and other markets as the renminbi story evolves.
On the regulatory front, Basel III is expected to challenge all trade providers with its stringent capital reserve requirements. Notwithstanding the capital aspect of the regulations, we also see that business models, processes and systems will need to be looked at and fine-tuned where necessary to ensure that the trade finance sector remains well-placed to stimulate expansion and growth in the global economy through commerce.
What developments should we expect in the region in 2011? Can you identify any trends that could disrupt trade finance in Asia-Pacific, for instance Western economic weakness or possible protectionist measures?
Imports to the US are expected to slow given that North American inventories are gradually returning to normal levels, and exports from China may concurrently drop following the China government’s efforts to reign in the economy, restrain GDP growth and manage inflation. However, resilient intra-regional trade flows combined with the continued growth of India will largely offset any significant impact from a softer China market in 2011. In fact, we believe that a reduction in China’s GDP growth would result in a more sustainable, long-term environment that would benefit the trade finance sector.
While the more developed markets may find it difficult to build momentum, Asia has proved that while the region has not decoupled from the likes of the US, we do remain sufficiently independent when it comes to driving our own growth.
Stepping away from trade flows, we will see positive developmental progress from companies and financial institutions in the trade finance space. On one hand, the gap between sophisticated multinationals and home-grown Asian companies will continue to converge over the coming year, a trend driven by a rapidly growing confidence from Asian companies buoyed by the region’s strong economic health. They’re hiring good people, and they’re hiring fast.
Part of this increasing sophistication comes from a better understanding of the role technology and platform innovation plays fuelling a company’s growth, along with the importance of partnering with a global provider who can deliver these solutions. There’s a greater demand from local and regional companies seeking global platforms to connect buyers and sellers under one umbrella, creating better visibility and improving the financing flow.
Given the greater role that Asia now plays in the world economy, particularly with regard to trade, do you expect to see greater competition in 2011 as banks build their trade finance businesses in the region? Can you also comment on the role played by domestic banks?
As a result of today’s risk-averse environment, competition in the trade finance space will continue to grow. We would expect to see a greater interest from global players who have stepped out of the business over the last few years, along with a renewed focus from some of the larger regional companies who may have thus far had a more limited presence in a few key markets.
Having said that, we believe that a more dynamic and competitive environment populated by a wider mix of new and established players is crucial to the trade finance sector’s future growth. For banks like J.P. Morgan, a greater range of newer and relatively less experienced players will likely see a higher premium placed on the bank’s trade finance experience, including the expertise of its people, its technological sophistication, its global reach, and ultimately, its ability to deliver right through to the most complex of solutions.
J.P. Morgan has a clear strategy in relation to our trade finance business, and we very much recognise the need to work closely with our domestic bank partners to ensure that we provide our global clients with the coverage and in-country services that they require to execute and grow their business.
Banks are reporting that their clients expect more tailored and integrated cash and trade services to better manage their working capital. Has this also been your experience?
Typically speaking, the industry is moving towards greater integration of the cash and liquidity management and trade finance functions, and there is a greater understanding of the efficiencies that can be achieved by taking a holistic approach.
At J.P. Morgan we’re addressing this trend by innovating for our clients based on their demands and requirements, both in the short-term and the medium- to long-term. We take the view that while our trade finance platform is one of the gold standards among the industry, over the next few years we’ll be taking it further still, investing a significant amount of capital to re-imagine our technology and processes and emphatically redefine what a trade platform can be. This enhanced platform will incorporate not just transactional capabilities, but also financing solutions, foreign exchange systems, document imaging, purchase order management and the like. It will revolutionise the way we approach trade finance, and this streamlined infrastructure will improve the client experience by making sure that we evolve in the same direction as our clients.