Securing Trade Finance for Asia’s Future Growth

china_2660807bThe Society for World Interbank Fund Transfer, or better known by its acronym SWIFT, has payment and money movement data that is second to none.  SWIFT along with the Fung Institute recently published a paper that looked at Asia Trade Flows and the future of financing that growth.

Besides the typical the “Future is Asia” and “Trade is important to promote intra Asian growth” findings  (do you really need research to have this as your conclusion), some of the more interesting nuggets are actually in the Appendix:

  • In 2012, Intra-Asia Pacific trade (Letters of Credit) rose by 7.6 per cent year-on-year to 74.5 per cent of total Asia-Pacific trade. Compare this to North American usage of the Letter of Credit (7%) or Europe and MENA (16%) and you see Asia has a long way to go in areas like Private trade credit insurance and open account finance initiatives.  This is also pretty scary when you consider a Letter of Credit trade finance transaction involves multiple parties exchanging multiple documents.
  • RMB trade settlement and daily trading volume are increasing strongly.  HSBC forecast that 30 per cent of China’s total trade will be settled in RMB in the next three years, up to RMB 12.2 trillion (US$2 trillion).  If you are doing business in China, be prepared to do RMB invoicing.
  • Clearly, RMB internationalization is under way and SWIFT data indicates that RMB is now the world’s second largest currency of denomination in Letters of Credit (L/Cs) transactions.
  • Mulitlateral Agencies such as the Asian Development Bank are critical to provide trade finance.  In 2012, ADB’s Trade Finance Program funded a total of US$4 billion, benefiting 1,577 SMEs20.  Local banks noted that "without the ADB program, their trade finance support to companies would decline by at least 13 per cent21."

By 2020, the Asian region is expected to account for almost 35% of world GDP, compared to 27% today.  Finance is still stuck in the Letter of Credit and Mulitlateral support world but I suspect times will change quite rapidly.

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