There have been a number of major shifts within trade and trade finance over the past two years. One major change has been in the direction of trade routes. Supply chains have traditionally operated across an ‘east-west’ axis. Much of trade financing was focused on ensuring the requisite infrastructure in the US, Europe and Asia.
Now, some of that supply chain is shifting from north Asia and into Association of South Eastern Nations (ASEAN) countries such as Vietnam, Cambodia and Indonesia.
“China has developed beyond being a cheap manufacturing hub, and is now in a position where it is actually developing some quite advanced IP,” says Peter Burnett OBE, Managing Director of Standard Chartered Bank in Hong Kong. “North Asia has outsourced some more basic manufacturing to ASEAN and this has influenced a market shift towards north-south. Supply chain finance has been reconfigured to accommodate this trend.”
Supply chains are also digitising rapidly. Trade finance has historically been a paper-intensive process, but it has moved rapidly towards digitised models, improving efficiency and removing human error. The use of blockchain technology is also a more recent phenomenon and has had some beneficial effect on financial inclusion. A car manufacturer, for example, can use a blockchain to issue tokens to businesses within its supply chain, which in turn are able to use that credit to get financing it would have otherwise been excluded from, using the car manufacturer’s credit position and history as the basis for lending.
Trade finance credit analysis is also changing with the use of technology. It is able now to move away from historically valued collateral-based pledges and work on ‘tech-based’ credit-scoring models, including real-time transaction data and ‘machine learning’ technology.
There has been a growth in the use of offshore renminbi (RMB) in trade finance. China is now the world’s second largest economy, and it befits such a large economy to develop its own current account currency for use in offshore trade settlement.
Finally, the sustainability agenda is driving change across supply chains, which is enhancing due diligence across the whole supply chain to ensure every link is fulfilling sustainability criteria.
Burnett, who will be speaking at an international ICAEW event on supply chain resilience and due diligence, explains that the technology and sustainability trends within supply chains are interlinked; accelerated technology adoption is increasing efficiency across many factors, including due diligence, much of which can be automated. Banks and lenders are looking for moves towards achieving net-zero objectives and are shifting investment away from carbon-intensive supply chains, such as those that use coal in the manufacturing process. This approach cannot currently be taken for all materials – coal is currently needed for steel production – but the market is looking for viable alternatives.
“It’s partly because we think it's the right thing to do, and it’s partly because our stakeholders and employees think it’s the right thing to do. We spend quite a lot of time talking about it.”
The pandemic has also had some hopefully shorter term impacts, with a shift from ‘just in time’ to ‘just in case’ encouraging the hoarding of commodities. This has had a negative impact on prices throughout the supply chain.
It’s not the only negative to come out of the pandemic. It’s been well documented that the war in Ukraine and the effects of inflation are impacting supply chains, but the backlash towards globalisation is also exacerbating the situation.
“We’ve seen most economies win as a result of globalisation, but what we’re now seeing is a concern about an over-dependency,” says Burnett. “Food, medical supplies, finance – there are a number of areas where countries are questioning whether they have become overly dependent on third parties for these critical supplies for their economy and infrastructure.”
Some analysts predict that the worst of this will be over in quarter one of 2023, but there could be a lasting deflationary impact, which could extend the period of recovery. “There are a number of variables that are very difficult to control,” says Burnett.
The developing world will probably bear the brunt of the longer-lasting impacts of these factors; there is already a risk of food shortages across Sub-Saharan Africa. The western world will be able to weather the storm, despite impacts on the cost of living, Burnett explains.
There are reasons to be cheerful in Asia – the Greater Bay Area initiative in China, for example, is more closely integrating Hong Kong, Guangdong and Macau, allowing for the free movement of capital, people, goods and services. “At a basic level, Hong Kong is the financial centre, Shenzhen is the IT centre and Guangzhou is the advanced manufacturing centre.”
Trade only works if there’s a high degree of trust, Burnett explains. “We’ve lost quite a bit in the last two years. Hopefully that trust will come back and we can return to proper globalised, sensible trading.”
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