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Facilitating Trade and Economic Transformation
An interview with Ashutosh Kumar, Global Head of Corporate Cash & Trade, Transaction Banking, Standard Chartered Bank
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.