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Basel Rules May Stifle Trade, Wal-Mart Supplier Says

Li & Fung Chairman Victor Fung
Victor Fung, chairman of Li & Fung Ltd., the Hong Kong-based supplier of Wal-Mart Stores Inc. Photographer: Timothy O'Rourke/Bloomberg

Global bank regulators risk choking commerce through new rules that treat trade finance as being as risky as derivatives, said Victor Fung, chairman of Li & Fung Ltd., the Hong Kong-based supplier of Wal-Mart Stores Inc.

The Basel III accord reached last month doubles bank capital requirements to protect against defaults. While the overall accord is prudent, it threatens importers and exporters, the supplier’s billionaire chairman said.

“The problem is they put trade finance into the same basket as derivatives,” Fung said in an interview in Hong Kong. “So the amount of capital you have to allocate to trade finance is the same as high-risk financial products, which we think is unfair.”

Fung was chairman of the International Chamber of Commerce until July. The Paris-based lobbying group in April said that access to trade finance remained constrained in the aftermath of the global financial crisis, which caused the deepest contraction in world trade in the postwar era.

“Trade finance is extremely important to Li & Fung,” said Matthew Marsden, a Hong Kong-based analyst at Samsung Securities Co. “It is the grease that allows the wheels of Asian manufacturing for export to turn. They are absolutely right to object to any legislation that increases the costs of this crucial component of world trade.”

‘Extremely Dangerous’

The European Banking Federation, a lobbying group, last month warned that tighter rules designed by the Basel Committee on Banking Supervision may limit lending.

The new rules may be “extremely dangerous,” Li & Fung’s chairman said at a briefing. “If a small- or medium-sized enterprise sells to Marks & Spencer, or to Wal-Mart, with a 90-day receivable, it’s a very safe receivable. It should not be the same as some sort of derivative or option.”

“We’re concerned that trade finance will not get the allocation and trade finance in the world could be squeezed," Fung said. "That actually could cause another major downturn in trade."

Li & Fung, which also supplies Kohl’s Corp., Marks & Spencer Plc and Inditex SA’s Zara, has climbed 31 percent this year on the Hong Kong stock exchange. That makes it this year’s sixth-biggest gainer on the 45-member benchmark, which has advanced 9 percent. Li & Fung fell 3.2 percent to HK$42.35 at the 4 p.m. close of trading in Hong Kong.

Silk Trader

‘‘It’s still very difficult for small- and medium-sized enterprises to get trade finance,” Gabriel Chan, a Hong Kong-based analyst at Credit Suisse Group AG, said in a phone interview today. “Some of their clients may not be able to do business because they can’t get finance."

Li & Fung President Bruce Rockowitz on Oct. 7 said the company expects a "very good" year in 2011 as purchases and sourcing agreements boost revenue. The company has in the past year announced acquisitions worth more than $2 billion, according to statements and analyst estimates.

Fung and brother William Fung are the biggest shareholders in Li & Fung, which was founded as a porcelain and silk trader in southern China in 1906 near the end of the Qing dynasty.

Victor Fung is a member of the Chinese People’s Political Consultative Conference, an advisory panel to the country’s legislators. He was chairman of Hong Kong’s Airport Authority from 1999 to 2008 and chaired the city’s Trade Development Council from 1991 to 2000.

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