According to Sumanta Panigrahi, Head of Asia North & Australia, Trade and Working Capital Solutions, and Hong Kong, Treasury and Trade Solutions at Citi, “Asia’s trade flows and capital solutions are a tale of two parts.”
For one thing, he notes, trade volumes coming out of China, Hong Kong, and to a lesser extent Taiwan, have been slowing down considerably since 2022. “But despite the challenges of the last few years, Asia still represents a very large portion of overall global trade volumes: in 2022, Asia’s exports accounted for about 36%1 of total volumes globally.”
At the same time, says Panigrahi, companies in Asia are looking to reduce their dependence on China with the rise of a strategy known as ‘China plus’. “It’s not about looking to replace China, but a lot of corporates are now focusing on China plus one or more other jurisdictions,” he notes.
Research2 has shown that 28% of global manufacturing capacity is still located in China, compared to 3% in India and 5% in ASEAN as a whole. “So you can’t wish away China as such a big global manufacturing hub. But there is certainly a shift away from China, and reshoring and the return of jobs and capacity is happening in a big way.”
Diversification and resiliency
According to Panigrahi, this trend is being driven by a number of factors, including a focus on diversification in order to avoid dependency on particular suppliers – a risk that was highlighted during the pandemic. However, it is also important to note that diversification may come at a cost. “You can have a huge amount of diversification, which give you a just-in-case type of supply chain resiliency, but that redundancy has a cost associated with it,” he reflects. “It’s about balancing both of these things.”
Against this backdrop, Panigrahi says Citi is “effectively mediating a lot of these trade and capital flows for our clients as they look to make their supply chains more resilient and dispersed, rather than being concentrated in one location.”
Shifting trade flows and capacity
While trade volumes in China and north Asia may be slowing down, resulting in challenges for the trade and working capital solutions business, Panigrahi says that markets such as India, south Asia, ASEAN and Singapore are effectively the beneficiaries of this trend, with trade flows growing rapidly in these markets.
Meanwhile, as companies look to diversify and make their supply chains more resilient against shocks and changes, they are focusing on emerging market countries with certain important characteristics. As Panigrahi points out, the markets that are attracting additional investment are the ones with reliable infrastructures and logistics, as well as an attractive regulatory climate and the availability of skilled labour. “The best example in Asia is Vietnam,” he adds.
Unlocking liquidity from the balance sheet
As this shift continues, global trade and working capital banks like Citi are supporting corporates with short-term trade finance, as well as facilitating longer-term financing. At the same time, treasurers are increasingly seeking to release liquidity from the balance sheet by optimising working capital metrics such as days sales outstanding (DSO) and days payable outstanding (DPO).
During Covid-19-related lockdowns, which were still being imposed in Asia as recently as last year, many companies took steps to avoid over-dependency on particular suppliers and markets, as well as logistical challenges. In many cases, they achieved this by building up significant levels of inventory.
“That locked up inventory means locked up capital,” says Panigrahi. “And with the cost of capital going up in an increasing interest rate environment, it becomes very important for clients to be able to manage that and preserve their margins.”
As such, he says there is a growing need for structured solutions that can help companies reduce their inventory levels and release as much liquidity as possible from their balance sheets. “Banks like us have been on this journey with corporates, structuring solutions and helping them improve their working capital metrics,” he adds. “And that has become very critical for them in this environment.”
Financing industry trends and supporting ESG
On another note, Citi is playing a key role in financing industry-specific trends – such as the electronic vehicle (EV) transformation. “Our clients expect us to be in the middle of this transformation,” says Panigrahi.
Likewise, the bank is helping to facilitate sustainable supply chain finance which offer suppliers incentives if they contribute towards the buyer’s sustainability objectives. As Panigrahi concludes, “These types of solutions are still evolving, and we are right at the heart of these developments. At the same time, there are many more players along global supply chains, and being able to service as many of those as possible helps each and every element of the supply chain.”
