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China trade financing reviving, but bankers wary

Beijing, June 10, 2009

Bankers say trade financing in China is reviving, up to a point, thanks to ample liquidity in the domestic banking system and confidence in the steps that Western governments, especially in the US, have taken to prop up their banks.

"It's by no means 'cowboy time' with people running out and discounting letters of credit as though there's no tomorrow,” said Karl Alomar, the chief executive of China Export Finance.

“They are still being very cautious, very specific about terms and structure and documents and signatures," he added.

And although Chinese banks were displaying more of an appetite to finance trade, smaller Chinese firms in particular would struggle to get banks to start discounting their letters of credit, a staple of trade finance, Alomar said.

"The market is opening up, but to a limited audience," said Alomar, whose firm arranges trade finance for exporters of Chinese goods to Western markets.

As for Western banks doing business in China, many simply did not have enough capital to provide the same level of funding as they did in the past.

"You're seeing a lot of people having credit pulled away from them. There's not the same availability of letters of credit that they would have had before September 2008," he said.

Government support

All this spells business opportunities for cashed-up Chinese banks as their Western rivals seek to refinance their loans or lay off risk, said Wu Guoshan, a deputy general manager in Agricultural Bank of China's international department.

"We see a growing demand for export risk insurance. At the same time, we're noticing more requests from banks for L/C confirmation and risk-sharing in trade finance," he told an Asian Banker forum last month in Beijing.

The International Monetary Fund estimates that the shortfall in trade finance reached $500 billion early this year. It reckons the gap has now shrunk to between $50 billion and $220 billion.

Christian Edelman, a partner at Oliver Wyman, a financial services consultancy, said trade financing volumes were now recovering from a nadir reached in the first two months of the year.

He estimated two-thirds of the contraction in trade was due to a slump in final demand. But the remainder was caused by the evaporation of credit as banks shied away from lending to one another.

"The question is how the banks are able to refocus on trade,” he said.

“I think that's one of their key priorities, given that trade is relatively low risk," he added.

But for many banks, even if they are not short of capital, it is not business as usual. Risk aversion has increased and, for now, is here to stay.

"There's a tendency on the part of banks to be more selective," said Yanti Agustin, Asia Pacific head of global trade services in Singapore for J P Morgan.

She said official export credit agencies and international financial institutions could do much more to help lower banks' risks by extending coverage and cutting red tape. A pledge to boost trade finance made in April by the Group of 20 developed and emerging economies had so far had little discernible effect.

"Needs are much greater than availability at the moment," Agustin said. "If we could have a more robust programme supported by governments, that would help a lot." – Reuters




Tags: China trade | Beijing | Bankers | export finance |

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