01 November 2016

HSBC eyes trade finance gap in services sector

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By Jamie Lee

Published in The Business Times, 3 October 2016

Source: The Business Times © Singapore Press Holdings Limited. Permission required for reproduction

HSBC, which processes US$1 million worth of trade every minute, is eyeing trade funding gaps in the services sector, as growth in global trade shifts from shipping physical goods across borders to cross-border trade in labour and skills.

As the bank - a major force in trade finance - responds to the structural changes in trade, it has been financing click-based revenues from e-commerce players, as well as offering working capital to other service firms, Natalie Blyth, HSBC's global head of trade and receivables finance, told The Business Times.

HSBC does not have figures to show growth in this business area, but believes it is among the few banks that fund future receivables.

"The banks need to understand what the business model is, how structured and firm that revenue obligation is," said Ms Blyth in an interview. "It doesn't have to be a physical goods movement anymore."

HSBC is working with digital advertising firms and recruitment agencies to manage their trade and working capital needs. It is also working with technology companies in China and India that provide technology support services to Western firms.

Ms Blyth acknowledged the headwinds in global trade, with trade growing slower than that of GDP - in itself, paltry. The value and volume of container shipping flows remain depressed alongside that of commodity prices, with the bank expecting real global export growth of just about one per cent this year. Without citing figures, Ms Blyth said the bank has gained market share at a time when competitors are shrinking their commitment to trade finance.

But HSBC is eager to latch onto a global trade finance gap, which is now at US$1.6 trillion, the latest report from the Asian Development Bank (ADB) showed. Of this, half is estimated to be out of Asia.

Recent events - such as the distress of Hanjin Shipping - are bringing to light the stresses in the market, said Ms Blyth. "People can now see the interdependencies of evolving supply chains," she added. The bank is seeking more growth through structured trade finance, which takes a more targeted look at risks flowing through the supply chain.

This is as the global supply chain has become more complex, with trade no longer about moving mostly finished goods made in one country. Trade is now about sales of intermediate inputs, so goods are being transported several times to several companies, and passing multiple borders.

At the same time, about 70 per cent of global GDP is now made up of services. Not all of trade in services is financed by banks, noted Ms Blyth.

HSBC's research also showed the nominal value of services exports grew at a compounded annual growth rate of 5.9 per cent between 2005 and 2015, whereas the comparable figure for goods was 4.6 per cent. This is set to continue, said Ms Blyth.

China's move from exporting to being a consumer-led economy is playing a major part in the change in trade patterns, she added. But with the "seismic shift" from low-end manufacturing towards services comes a strong flow of foreign investment pouring into China. These flows into value-added sectors such as services and high-tech manufacturing, Ms Blyth noted, are preferable to flows into low-value manufacturing.

The shifts in trade have particular relevance to Singapore, given its financial hub status in Asia, and its position as an Asian base for many multinational companies (MNCs). Moreover, Singapore's trade-to-GDP ratio is among the highest in the world at more than 300 per cent.

China is Singapore's largest trade partner, and Singapore is China's third largest foreign trading partner for services after the US and Japan. "We seriously buy into the fact that Singapore, within Asean, is going to be a key hub," Ms Blyth added.

But this comes amid the rising spectre of trade protection and over-regulation that could threaten growth.

Ms Blyth observed that Singapore's Prime Minister Lee Hsien Loong had underscored during the G-20 Summit the importance of trade liberalisation, and the critical boost from trade to growth. This comes at a time of political discourse around two key trade pacts: the Trans-Pacific Partnership (TPP), and the Transatlantic Trade and Investment Partnership (TTIP), she added.

The TPP is a trade agreement among 12 countries including the US and Singapore, while the TTIP is a trade pact between the European Union and the US.

"The G-20 recognises the important role trade plays in supporting growth, which is why they are promoting efforts to roll back protectionism, cut red-tape at the borders and boost access to trade finance," Ms Blyth said.

This also comes as many small and medium-sized enterprises face relatively high rejection rate in trade financing requests compared to the MNCs, said the ADB. Nine in 10 of surveyed banks cited anti-money laundering and tougher client onboarding requirements as "impediments" to expanding trade finance, especially for small businesses. Basel III banking regulations were also cited by 77 per cent of poll respondents as a major barrier to funding new trade.

In a speech in July, Monetary Authority of Singapore (MAS) managing director Ravi Menon warned that further tightening of regulations in areas such as trade finance could constrain lending and derail economic growth.

For example, a proposed change by the Basel committee in the way bank exposures are measured could result in significantly higher capital requirements for trade finance. These would be "more punitive than justifiable by its historical losses", Mr Menon said then, noting that trade finance - being short-term and self-liquidating in nature - is probably one of the safer forms of bank lending.

Likewise, Ms Blyth said there must be a more constructive understanding of how trade is financed, calling for advocacy for a "risk-based regulatory treatment of trade financing that will create a safer financial system".

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