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Banks on guard over China exposure

They scrutinise trade finance transactions for abuse

Banks in Singapore are watching their exposure to China, particularly as fears over an economic slowdown and the creditworthiness of Chinese corporate borrowers take hold - PHOTO: REUTERS

[SINGAPORE] Banks in Singapore are watching their exposure to China, particularly as fears over an economic slowdown and the creditworthiness of Chinese corporate borrowers take hold.

But there is debate over the amount of risk - and to some extent, responsibility - taken by banks, especially if the trade financing is heavily incentivised by arbitrage.

CEO of DBS Piyush Gupta has said the bank has no direct exposure to shadow banking in China, and is not linked to any "overexposed" Chinese bank.

UOB's head of investor relations and research, Jimmy Koh, said UOB China's wealth management solutions focus on plain vanilla products and bancassurance. The China exposure in its loanbook is small, compared to its peers.

And OCBC's CEO, Samuel Tsien, has said the bank is managing its risk by targeting clients with care.

Besides the overarching concern over the health of China, there is caution as banks here observe the use of long-tenor letters of credit (LCs) - loans from which Chinese borrowers can churn money into risky high-yield products.

Singapore-based banks usually represent the Chinese exporters, who can get a loan from banks here, instead of waiting for payment from Chinese importers, especially if payment is due one year later.

One argument is that since offshore banks - such as those based in Singapore - represent just the offshore exporters most of the time, they are technically managing one side of the risk in the trade.

If the Chinese importers default from churning money into risky, high-yield products, it is less of an immediate risk for the offshore banks as long as Chinese banks represent the importers, bankers said.

"We don't take direct risk on the Chinese importers, we take risk on the Chinese banks," said Piet-Hein Ingen Housz, global head of metals commodities at ABN Amro. "I don't think the Chinese banks will default. The Chinese banks are primarily owned by the Chinese government, and a default would result in systemic risks."

If an offshore bank represents both the importer and exporter, though, then the risk is higher.

Most banks will point out that the average tenor for all their trade loans is around six months. Most trade finance loans are, indeed, short-term in nature.

They also note that strictly speaking, banks are usually tasked to verify trade documents, but not the shipments' contents. If the shipment passes muster, banks are expected to honour the LCs.

But bankers like Catherine Low from ING Bank think banks have to take their responsibility further.

"We are very selective of our clients. We want to support the real economy," said Ms Low, ING's country manager in Singapore.

As an example, the bank will shun importers asking for certain commodities that they do not typically buy, with a view that they may be making use of trade financing for speculation.

"We tend not to work with clients that are arbitraging certain trends."

Some banks have trimmed their exposure to third-tier banks, sources said. For ING, its caution means that it will not work on a trade linked to a client with a poor track record, even if the firm is backed by a top-tier Chinese bank, said Ms Low.

Citi, which holds some exposure to third-tier banks, ensures proper hedging with commodity financing, said Parvaiz Dalal, the bank's head of structured trade, commodity financing and asset distribution in the Asia-Pacific.

The Singapore office has not seen 360-day LCs come in, said Melvyn Low, head of global transaction services at Citi Singapore.

Banks also watch their exposure to small-and-medium enterprises, said Yap Sim Woon, head of trade product management for the Asia-Pacific at RBS.

Paul Dowling, principal analyst at East & Partners Asia, told BT: "The smaller the company, the more likely they are involved in shadow banking."

Then, there's some fine detective work that banks go through to ensure that the trade financing is backing genuine trades, particularly with long-tenor loans.

"It'll probably raise alarm balls if the long-tenor financing is for apples," said Mr Yap.

ING checks for "out of whack" prices of commodities such as oil and iron ore that are quoted in trade documents. It also goes as far as checking if the shipment is being loaded on an appropriate ship, said Ms Low.

Similarly, DBS uses third-party shipping documents as evidence of the shipment of goods, among other forms of verification, said Lum Yin Fong, the bank's head of global product management, global transactions services.

Still, it's important to have foot soldiers in the region, especially if the offshore bank is acting for both the importer and the exporter.

"You have to have resources on the ground," said Mr Dowling. "If you try to transact remotely, you can't follow the money."

Banks can also fall back on a well-worn strategy.

"Our exposure is not just in China. We have counterparties in Indonesia, Vietnam, Thailand, even Mongolia," said Ms Low. "That's one way of managing: diversification."

With additional reporting by Andrea Soh