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Corporates respond to prospect of lengthy trade war

With the dispute between the US and China unresolved, companies are turning to their banks for trade and financing solutions such as letters of credit (LCs), commodity finance solutions, and financial guarantees to offset the impact of a trade war, reports The Asset.

The website says that global corporates are attempting to adapt to what they perceive will be a lasting conflict between the US China trade war, with more tariffs and retaliatory measures likely, and position their business to cope with the resulting uncertainty and volatility.

As part of these measures, companies are turning to their banks for trade and financing solutions that will help them to weather the crisis.

“A trade war is never good for anybody because it creates a lot of uncertainty and volatility in the market and as a result, some companies and financial institutions will need to adjust their production capabilities,” says Victor Abad, managing director and head of multinational clients, APAC at ING Bank, tells The Asset.

Abad leads teams that serve the requirements of US and European companies with an inbound business to Asia, as well as Asian companies with an outbound business to the US and Europe and companies with intra-Asian businesses.

“I think it’s very difficult to estimate the immediate effect of the trade war,” commented Abad. “I’ve been recently traveling in Europe for two weeks visiting companies in six to seven countries. The general sentiment we get in the market is that the trade war is going to last for some time. Most of the companies are trying to adapt to the changes.”

One-way investment flow

In response to the challenges of a trade war, some companies with production facilities in China are relocating them elsewhere. For these companies, the most common requirements include long-term financial instruments to finance their new capital expenditure plans as well as trade solutions such as letters of credit (LCs), financial guarantees, bid bonds, commodity and FX hedging solutions.

Other requirements are export and import financial alternatives to support their new trade flow operations.

“The trade war is also having some impact on the merger and acquisition (M&A) activity,” said Abad. “There is a change in the flow. In the last five years we have seen a significant acquisition activity from Asia – especially China – into Europe. However, in the last couple of years this tendency is reversing. We see more growth in the corporate finance activity from Europe into Asia.”

Data from media group Acuris (formely Mergermarket) shows that the total deal value for investments from China to Europe was flat in 2017-18, growing by just 1%. Investments from Europe to China grew by over 160% for the same period, while the total deal value for investments within intra-Asia grew by 3.5%.

“Based on our conversations with clients, we expect the flow of investments from Europe into China to continue growing,” said Abad.

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This item appears in the following sections:
Cash & Liquidity Management
Cash & Liquidity Mngm in Asia-Pacific
Cash & Liquidity Mngm in North America
North America
Risk Management
ERM - Enterprise Risk Management
Financial Risk Management
Trade & FSC Management
Trade & Counterparty Risk Mitigation

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