Wednesday, October 29, 2008
Credit Crisis is hruting Asian Trades
--Two Chiese companies went bankructpt because they could not afford debt payment. --Credit squeeze hurt trading companies, which relies on US credit letters. It benefits US dollar. --Generally Asian banking system look health except South Korea, Australia, & Pakstain.. The credit crisis is hitting Asia where it most hurts—trade ReutersLITTLE by little, the credit crisis is causing problems in the belly of Asian business. On October 20th CITIC Pacific, a Chinese conglomerate, stirred fears about the hedging strategies of companies across the region when it revealed a potential $2 billion loss caused by a bad bet on currencies. It is being investigated by Hong Kong’s authorities amid concerns that it failed to reveal the loss quickly enough. Also, two big Chinese companies, Smart Union, a toymaker, and FerroChina, a steelmaker, have gone into default this month, as have three Hong Kong retailers. Each, unable to find funding, had become increasingly slow to pay its suppliers. That problem is becoming pervasive, says the regional manager of an industrial-packaging operation, which puts an additional squeeze on business prospects. Technically, the local banking system in Asia should be healthy enough for banks to continue to lend. With the exception of those in South Korea, Australia and Pakistan, most banks can finance all their loans with deposits, which puts them less at risk from strained money markets. They are well capitalised and profitable. That, however, has not stopped fear-induced glitches. Several weeks ago, Chinese banks briefly cut off credit to international banks before the government intervened. At least one Hong Kong bank is still holding back from resuming normal credit transactions with its American counterparts. International banks are being even tougher with their clients. An executive at a big global bank says that credit lines are being trimmed, except for those to the largest and most established businesses. There are three reasons for this. The most important is that many banks do not have the funds to lend: the massive charges taken for bad loans in their home markets have reduced capital, even after the recent lifelines from Western governments and a few brave investors. Banks are also hoarding their cash, aware how precious it is. Risk, too, is being repriced, even in areas as supposedly safe as trade credit. That is where Asian companies are most vulnerable. Instead of relying on broad capital markets as is common in American and Europe, they seek credit in more traditional ways: bank loans, the sale of discounted receivables, and letters of credit. One trading company based in China says the collateral required for a letter of credit—typically a safe kind of loan because it involves merely delivering something to a customer—has jumped from 25% to 50% of the stated amount. An odd beneficiary of this squeeze has been the dollar, since orders are increasingly being settled in cash. In recent weeks, talk has grown of container-loads of goods unable to travel to America and Europe because they cannot be financed. More recently, there have been reports that traffic is stalled the other way. Several ship brokers refer to a vast order of scrap metal stuck on America’s West Coast that was bound for China. Some of the disruption is an inevitable consequence of faltering demand as the world economy slows; some traffic will be liberated as a result of the thaw in interbank-lending markets. A good measure of the environment is the spot rate for carriage on container ships; it has crashed. These same rates in the forward market suggest only the most modest recovery in years to come. There is little reason to hope confidence in Asia will rebound soon.