THE GROWTH OF TRADE FINANCE IN CHINA AS THE ECONOMY IS IN THE MIDST OF 'NEW NORMAL' by Guo Lixin, Head of Forfaiting, Bank of China

Starting from the second quarter of the year of 2014, the sales people of foreign banks covering the trade finance business in mainland China became very concerned about the scarcity of the ever booming correspondent banking business, such as letters of credit (L/C) discounting, refinancing under L/C or TT remittance, or even the secondary market of forfaiting against domestic L/C denominated in the currency of Renminbi.

Many FI people in charge of trade products visited the Chinese banks and repeatedly asked the same question,“why the volume of trade finance of Chinese banks has dropped so quickly?”  Actually this is also the pending issue we have tried to find an answer to in the past several months.

In a party organized in Beijing by ITFA’s North East Asia Regional Committee (NEARC), representatives from major Chinese banks commented that the fall in commodity prices, tightened banking regulation for inter-bank business and enhanced risk management implemented by banks all contributed to the drastic decline of trade finance volume. Taking iron ore as an example, when a bank financed the import of cargo at USD140 per metric ton in 2013, it only needed 50% of financing for the same at USD70 per metric ton of iron ore in 2014. This trend of decline has been partially reflected by the trade finance data. By the end of 2014, the total outstanding of trade financing assets denominated in currency of USD of all Chinese banks decreased by 13% compared with that of 2013, while the financing denominated in currency of RMB decreased by 8%.

The weak demand for financing from Chinese banks has forced the foreign banks further lowered their offshore refinancing pricing to 40-50 bps over 3 month Libor. Meanwhile, major Chinese banks have plenty of liquidity in terms of foreign currencies. But banks in China are still very cautious about lending to private companies, as the average ratio of non-performing loan has risen to 1.25% by the end of 2014, 0.25% higher than the beginning of the year, according to data released by CBRC, the banking regulator of China. More and more banks in China are competing for the shrinking trade finance assets of lower credit risk.

Veterans of trade finance in Chinese banks cited that the slowdown of economic growth of China is the fundamental factor that caused trade financing to decline. According to statistics released by National Bureau of Statistics, the GDP growth of China in 2013 and 2014 was 7.7% and 7.4% respectively. Many people believed that the single digit growth rate of GDP will probably last for the next 10 years.

The Chinese government has defined that the economic development has entered into a stage of new normal, which means that its growth will aim to focus on the economic quality instead of speed, and it will depend more on innovations of mechanism and technology instead of heavily on consumption of natural resources. We learned from the recent conference of National People’s Congress of China in March, the target GDP growth rate for 2015 has been set at around 7%, which is the slowest growth rate for the last 15 years.

In February of 2015, People’s Bank of China cut rates by 25 basis points as concerns mount at the extent of the slowdown in the largest developing economy. However the funding cost for corporations operating in China remains at a relatively high level compared with that in the US and Europe. Analysts expected that the recent move to cut rate will somehow relieve the housing sector and encourage infrastructure investment, but its positive influence to the economy will be delayed until 6 months later.

People think that the year of 2015 will be a very challenging one for banks in China whilst there are still opportunities to explore. Firstly, there are lots of projects to be launched, likewise the planned investment to projects in railway and hydro power will be worth of RMB 1.6 trillion in 2015. Secondly, the banks will benefit from further development of RMB globalization and Free Trade Zone, from which the banks will continue to gain momentum this year. Lastly, but not least, the One Belt One Road strategic plan of China will boost the economic connectivity and development between China and other countries for the next 10 years.