EU-China trade has increased dramatically in recent years and China is now the EU’s second trading partner behind the US and the biggest source of imports. With that in mind, GTR gathered together a group of experts to discuss the facts and figures.
- Peter Sargent, head of transaction banking, Europe, ANZ (chair)
- Nick Diamond, regional head of sales – global corporates, transaction banking, Standard Chartered Bank
- Janet Ming, head of China desk Emea, global sales & strategy, corporate & institutional banking, RBS
- Eric Striegler, head of regional business development Europe, HSBC
- Lionel Taylor, managing director, LT Trade Advisory
- Ping Xiao, head of trade finance department, Bank of China London Branch
- Peter Cox, corporate relationship manager, Bank of Communications
Sargent: Where do you start with China? I came up with a few basic comments that everybody will be aware of. It is the world’s most populous nation. It has the world’s fastest-growing economy, notwithstanding the fact that it has slowed down because of policy change and its trading partners being in recession. In 2011, it effectively overtook Japan as the second-largest economy in the world. The growth in the economy has fuelled the raw-materials boom around the world, especially in countries such as Australia, and that has driven Australia to 23 years of uninterrupted growth.
There is, then, a lot that is good about China, but it feels to me as though China is going through a second evolution, if you like, in its development. If you look at where China is today, the sheer volume of urbanisation and movement of the population into the towns and cities is incredible and unlike anything that I think has ever been seen before; as is the growth of the renminbi (Rmb), which we will talk a little more about in a few moments, and the strategic importance of the Rmb, becoming the second-largest currency of settlement for trade. It has a long way to go to overtake the US Dollar as a settlement currency, but you could see it happening in time. The change in the implementation of fiscal policy – and the loosening of fiscal policy – will have a profound effect over the next couple of years on business.
I guess the elephant in this particular room is the whole question of: how does this work – and does this work – with political liberalisation? All of these suggest to me that the next five years for China are going to be as exciting, if not more so, than the last 10 or 15 even. Part of the purpose of today is to try to tease out from everybody their thoughts, opinions and views of China and its relationship with Europe as well as other countries around the world looking at the current situation and the foreseeable future.
With that in mind, the first question is: how has the European recession impacted on China, and vice versa? To a degree, how does this affect the business that each of you are undertaking?
Cox: China has acquired a modern-time view as the ‘world’s factory’ with huge exports of manufactured goods, built through resources from home and a large percent imported from abroad. In terms of trade cycle, when a key export market such as Europe falters this will have an impact.
This impact, however, has been softened by two factors (a) rise of the Chinese middle class, with more Chinese buying the goods which were previously exported and (b) a political shift toward more inward wealth generation and acceptance that they need to diversify the way the country’s economic growth is structured.
In many ways the European and global economic crisis was a good point for China to reassess and restructure. A classic example is the Chinese shipbuilding industry, which was quickly built up with the primary aim to overtake rivals Japan and South Korea. A primary growth driver was the global commodity super cycle, which began in 2000, and shipyards started to boom to meet the rising capacity requirements.
In China the structure of the industry growth was largely unchecked, China became the number one global shipbuilding country but in 2012 had 1,647 shipyards according to the China Association of National Shipbuilding Industry. In contrast, China’s main rivals, South Korea and Japan, had only 10 and 15 active shipyards respectively. Since the recession and slow down of shipping orders – a knock-on effect of slow trade – China has been using this time to consolidate and streamline this over-bloated industry.
Taylor: I am going to approach my comments as someone who has worked in conjunction with the Chinese authorities in different regions, some of the banks and factors, and directly with Chinese exporters. I recall meetings I had with Sinosure, the state export credit agency, where as part of the government’s stimulus programme they were tasked to increase their level of credit insurance underwriting to support Chinese exporters from US$20bn to US$80bn per annum. Year-on-year this target was raised further and Sinosure were very proud that they were able to hit the government’s targets. My thoughts were immediately on how they would manage the default rate that would surely occur because of the aggressive underwriting. Sinosure’s response was: ‘We have not been targeted in terms of that, so nothing else will change.’
Hindsight is wonderful but it is no surprise that Sinosure was hit with multibillion dollar claims which, as a state agency, they were more than fair in settling. Exporters however were faced with a long wait while Sinosure’s claims department struggled to cope with the volumes of claims. They were also taken aback by the cost and effort required to try and collect overseas debts.
No wonder therefore when speaking with Chinese exporters today, and here I am referring to SMEs and mid-caps in the textiles, components, small electrical and white goods sectors, there is a nervousness to agreeing open account terms with US and European importers.
Sargent: I am not surprised by that. Certainly from our point of view, we have seen quite a lot of healthy exports, but the type of imports from China to Europe – and to Australia – is changing quite radically. The underlying terms are changing quite radically too, as China becomes more secure in its own power. Underlying commercial negotiations are also beginning to become quite different, when you listen to some of the big corporates with whom we deal, we certainly get the feeling that the balance of power in negotiation has tipped towards China and away from somebody needing to do business with it. I know, Janet, you have been on both sides of the fence, and maybe you can give us some insight as to how that change is happening.
Ming: I was talking to somebody from the China-Britain Business Council (CBBC), who said that, in the past, it was always one direction: foreign direct investment (FDI) from here to China. Now, it is more and more the case that more FDI is coming from China to this part of the world. It is very good for us to discuss this, because the EU and China are definitely the most important trading partners. The EU is China’s second-biggest trading partner, next to the US. On a daily basis, trade is equivalent to US$1.6bn, which is huge. I read an article saying that, since China joined the World Trade Organisation (WTO) in 2001, trade between China and the EU has quadrupled. Last year, the total was US$590bn, which is a tremendous change.
Striegler: If I can throw some numbers in there as well, not only in terms of today but also the next 12 months, there is a rising expectation – and I am quoting just a few economies in Europe – on the corporates. In the UK, 86% of them say that they are going to increase their trade with China, and 63% in France. It is, then, not only about today but also what the future looks like.
Ming: I mentioned FDI coming from China. One of the key reasons is that China needs to diversify its huge US dollar-equivalent foreign currency reserve, which is 30% of the world’s total, of which 65% is in US dollars. This recession has created a golden opportunity for China in terms of this diversification. China has been shifting from acquiring natural resources from developing countries towards value-added assets in developed countries. This is also in line with China shifting its economy from export-led towards domestic consumption-led. We are seeing Chinese private equity and Chinese companies acquiring brands and technology from here, with the purpose of introducing them into China. We are seeing that trend happening.
Sargent: Ping, from what Janet has said, this insinuates to me that China is now driven by investing in Europe and by its companies becoming a part of the European economy, and I would have thought that your bank would be in the ideal position to see that and to spot the trends. Is that something that you are seeing?
Xiao: Yes, we do notice this trend happening. More and more Chinese companies are starting to invest in Europe. According to statistics from the Chinese Commerce Ministry, overseas investment amounts to Rmb240bn, an increased of 21.6%. We think the growth in ODI is driven by the demand of shifting the domestic overcapacity to overseas and acquiring brand and technology to maintain the sustainable development of the Chinese economy. As a Chinese bank which focus on supporting Chinese companies going abroad and doing M&As, we are going to set up a new investing banking business team, which will provide advisory services to M&A transactions by Chinese companies. But speaking of import and export trade business, it is not as optimistic as everybody expected. This month, the Chinese Ministry of Commerce released China’s latest import/export volumes. The total import volume dropped by 2.4%, while exports increased by 9.4%. Up to August, the total trade surplus was impacted a lot and rose to nearly US$50bn. We noticed that foreign trade is going through an adjustment period, just as Janet mentioned before, This is in line with China’s shifting of its economy from export-led and towards domestic consumption-led.
As you mentioned, China is going through political change, as is the economy. The Chinese economy is going through a tough period. The growth rate is getting milder. At the start of the year, the Minister for Commerce set a target for the growth rate of import and export volumes of 7.5%. Now, however, this target may not be achieved in the end, because the total growth rate is just 2.3% and we have only four months left.
Sargent: That is difficult. Could I pick up on a comment that Eric just made, which I thought was very interesting? It is this question about European exporters looking to do more business with China. I hear this a lot, and my issue with this is only that I am not sure that they know how to do it. I would be very interested to hear from Eric or Nick how, in your mind, you believe a typical small or medium-sized exporter, as opposed to the major globals, can get a foot into the door that is this huge China opportunity?
Diamond: The viewpoint I represent at this table is the European multinational corporates that choose to work with Standard Chartered as they look to invest in China.
What I see is every single European multinational that I speak to is still extremely focused on the trade flows with and investing in China. It is still the number one topic and I see no slowdown whatsoever in this and, to your question, finding out the best way to do it.
There is an enormous interest now in liberalisation – ie, how they can manage liquidity more effectively. The main role that we are playing is helping them through the different regulation changes and keeping pace with it. Even during the recession, and certainly afterwards, particularly focused on the anticipated domestic consumption growth within China, we continue to see an even bigger appetite for information and advice.
Sargent: Eric, help us out with a broader view of how a European exporter might begin to start dealing with China. I think that that is an issue for a lot of companies.
Striegler: I would say that most companies are already very familiar. If you are an SME starting your business, this becomes very difficult. If you look at the bottom of the pyramid, there is a lot of triangular trade that naturally happens between Europe and Hong Kong, or Europe and Singapore. At the end of the day, the trade is Chinese trade. A lot happens with trading partners that those companies can achieve, rather than going straight on to the producer in China, which is fairly common in that market. We see a lot of companies which are small in nature directly sourcing; for example, a furniture retailer in the UK that used to trade its furniture straight on and sourcing it from fairs in China. I would say that the tendency of direct trade is increasing, and the tendency of middle and small clients too is pretty much up there. In terms of the numbers I quoted, it was 90% of companies that have an annual turnover of half a billion, so it represents the market.
Sargent: That is a huge number by volume. That brings us on to something that I suspect will provoke some interesting thoughts. I was talking to one of our commodity clients fairly recently, and they were talking to me about the amount of times that they have been asked to contract in and settle in Rmb. They were trying to persuade me at the time to do non-deliverable forwards for 12 months hence, which had our markets guys quaking in their boots for a few minutes. They were saying that, in their own minds, they would expect to be in a position to do possibly a third of their business with China in Rmb in the relatively near future. Give me some thoughts on practical, interesting issues.
Cox: Bank of Communications is part of the City of London Rmb Initiative, alongside a number of the other represented Banks here. The Initiative publishes through Bourse Consulting a report on London RMB volumes each half year. As a subsidiary presently of Bocom in the UK we have only a small balance sheet and minimal RMB turnover with local corporates.
In terms of trade the most active requesters of RMB trade products directly to us have been one of the large American agri-commodity traders.
Diamond: SCB invest a lot in surveying our clients on this topic, so I will throw out a number and see if people agree or disagree. Our latest survey suggests that, already, 70% of EU corporations are utilising Rmb-denominated products in some way to trade.
That does not reflect the total percentage of transactions that they are effecting in Rmb, but it does show already that there is a shift and that they do have to have a mechanism in order to be able to trade in Rmb.
Sargent: Janet and Ping is this something that you see the multinationals being more aware of or more able to be involved in? How would you educate the type and size of customers there?
Ming: From my daily conversations with customers, that is definitely the trend. China is a huge market for JLR (Jaguar Land Rover), which has shifted 100% to Rmb invoicing. Ferrero, the consumer-goods company, has also shifted 100% to Rmb, so that trend is definitely coming. We are seeing the Chinese government and the rest of the world trying to make it easier to trade in Rmb. We are seeing more and more companies got themselves involved and more education being done by industry players. It really depends on how important China is to your future growth. If it is really important, you have to adopt it.
To add to what Eric mentioned, RBS, as a government-owned bank, has been supporting UK Trade & Investment (UKTI) and the CBBC for a whole series of seminars called Doing Business in Asia. The SMEs were told what to do by the experts, and they can get lots of information from us, UKTI and CBBC. These organisations also arranged a lot of trade missions to China, so SMEs can join one of them, group up together and go to lots of places to talk to people over there. It is not, however, a one-goal deal; you have to go to China several times, be patient and set up your partnership over there, and then you start from there.
Xiao: As a Chinese bank, I think we bear the responsibility to market Rmb business. In the initial stages, it is motivated by the government. As more and more customers get familiar with the Rmb, it is now motivated by the market, because more and more customers are aware of the benefits of Rmb settlements. Last year, the People’s Bank of China (PBOC) also released several policies to release the restrictions on Rmb settlements. Comparing foreign currency control, using Rmb to settle trade is much more convenient. I have also noticed more and more UK companies starting to deal in and invoice in Rmb, which is a big change.
Sargent: That is very interesting. Here is a question for the non-banker on the panel. Everything I hear so far is about the natural move to Rmb and, in five or 10 years, seeing this as just another currency. Do you think banks, with the exception of those around the table, perhaps, are yet capable of helping their customers with this currency?
Taylor: No, I think that within some banks there is still some debate on the implications of how to manage Rmb positions with confusion around the onshore/offshore trading status. Also because the liberalisation of Rmb is a gradual process controlled to suit the timescales of the Chinese Central Bank, some of the product teams are finding it a challenge to win the investment case to add a new currency into their organisations.
There is no doubt in my mind that China’s ambition to become the world’s trading powerhouse as indicated in the government’s five-year plan will be achieved and this will mean a more freely traded and open currency. However while I am seeing an increasing trend in using Rmb to support intra-Asia trade, the usage in other markets is more gradual. Some of the Chinese exporters we support are not as hung up as they once were when Rmb was appreciating more rapidly against the US dollar. In fact some see it as prudent to have more than one currency position as a way of hedging their bets.
I would also like to echo Janet’s comment previously made about the support open to UK companies looking to boost their trading with China. I also think that both UKTI and the Chinese Britain Business Council do a great job in assisting UK businesses looking to export to this vast market. Some of the exporters I have worked with comment favourably on how these agencies facilitate contact with other exporters who already found success in China. However, China is very much a face-to-face society and it is difficult to achieve success in China without going there. I think we in Europe are learning this and some countries quicker than others. For example, when in China it is noticeable how German business, especially the Middlestat have already achieved deeper penetration, so there is still much to aim for.
Diamond: I would add that, whilst we are helping corporates with the China agenda, we do have to manage their expectation, because it is different environment to helping corporates than in other places around the world. In terms of things that they might take naturally as a behaviour if they trade in other places around the world, we have to educate them that China is a rapidly changing environment, and they have to manage their own expectations and be flexible accordingly.
Taylor: I agree. Over the years, we have all heard the horror stories of major companies losing a fortune when investing in China often because they did not understand the culture or practices. As the Chinese start to invest and acquire companies in other areas of the world, it will be interesting to see how they adapt to cultures and working practices that may be very different to their own experience.
Sargent: That brings us to an interesting question, which is this whole regulatory transparency element. It does make you wonder sometimes. China joined the WTO years ago and has gradually evolved from the point of view of transparency of its balance sheet and the way it deals with international regulations such as Uniform Customs and Practice (UCP), for example. Have people had a positive or negative experience recently that would give us comfort that China is now at the forefront of regulating its business and at the forefront of looking at international business – perhaps UCP is the classic case? Have people had good or bad experiences over the last couple of years around that and what would work?
Ming: I have worked on both sides of the table – I used to work as an Asia Pacific treasurer. The pace of deregulation in China is the fastest among all Asia Pacific countries. It removes many headaches for corporate treasurers and makes their lives easier.
I run the China desk and one of my jobs is to update everybody on what is happening in China. It is fascinating that, even on a daily basis, I can share something new with them. That is the kind of pace that is really amazing.
At the top of the Chinese government’s agenda is integrating China’s financial system into the international system. However, because China has been closed for so many years, it takes time for them to gain experience and be more comfortable. Managing such a huge size is not like managing a small country in Asia or Europe; you have to be really careful. That is why they always take it step-by-step and cautiously. We are seeing things like the Shanghai Free Trade Zone, which is a holistic testing ground for all the financial reforms towards full, market-driven conditions. That is something really positive for us to see, and we have been receiving positive feedback from the corporates we work with.
Taylor: My view is that UCP is widely accepted by the Chinese banks. I think their understanding is helped by the need for interaction between banks to support the two sides of the transaction. I also feel that by their nature the Chinese like a level of formal structure and UCP provides this.
I think the financing of Chinese business still has a ways to go. State-owned enterprises are somewhat sheltered by their status and support from the main tier one Chinese banks. For the vast majority of private businesses and SMEs there is still a challenge to have the same level of working capital raising options that are available in the West. I think that regulation and the legal framework to support the growth of working capital finance needs developing and understand that this is recognised by the Government where the future financing of SMEs is on their agenda. The growth of factoring is quite interesting where there are now some 280+ licensed factoring companies. Five years ago there were only a handful and in 2013 alone, 200 factoring licences were granted at a regional level in mainly Shenzhen, Shanghai and Tianjin. However, there is a lack of knowhow and some questionable practices which highlights the need for a framework to regulate the growing sector.
Striegler: Rmb use is expanding, and it can be open account and third-party, but there is a lot of open account intercompany, particularly as corporates are now looking to centralise, monitor and control their foreign exchange (FX) exposures centrally, with treasury centres or shared service centres everywhere. Now that the regulation allows them to go through a bank for onshore or offshore, they can pick and choose which FX rates are more favourable for their futures, which provides a very efficient way of you just centralising in any desk you have somewhere – the Netherlands or Germany, for example – to manage your currency exposure.
Sargent: It is the single-most significant theme since the global financial crisis: the growth and importance of Asia. I saw some statistics the other day from McKinsey that said that, by 2020 – which sounds a long way off – 60% of world trade will have one leg in Asia. That is quite an incredible figure.
Striegler: All low-value factory goods are already shifting a bit towards south Asia. China’s focus is starting to be much more on the high-value-added side, moving away from things like textiles or low-value chemicals, which were Chinese legacies. In those sectors, they would focus on those that have a bit more value and let go of those with no value.
Ming: As China tries to move up the value chain, they are really hungry for hi-tech stuff. That is something that Europe can offer but there are still lots of things that China wants but Europe is not willing to sell. That will probably be one of the obstacles to further increasing trade between the two.
Taylor: The US by far is China’s main trading partner representing circa 37% of China’s trade. The EU is China’s second biggest trading market but due to the financial climate and improving Asian and Latin American economies, these areas are becoming more prevalent.
However, China is not having it all its own way. Wage inflation has allowed other lower cost countries to compete for business and some lower products are now being manufactured in places such as Vietnam, Indonesia and the Indian continent. Also, Latin America is growing in prominence as a more convenient market for US companies to trade with.
Sargent: Janet, put your treasurer’s hat on: where do you feel China and Chinese companies particularly will be in five years’ time?
Ming: More and more Chinese companies will become global players. The Rmb will become more globally accepted. I hope that it will be fully convertible in five years’ time. The Chinese government’s objective is to make Shanghai the global financial centre by 2020, so at least Shanghai will be the global Rmb clearing and pricing centre. Although there will be more deregulation, the capital account may not be fully opened. But I think at least things will be much easier than now. Generally speaking, the government needs to buy some time to get Chinese players more familiar with the rules of the international game.
Sargent: Where do you think the banking system in China is going to be in five years’ time?
Striegler: Deregulation will provide for a much more flexible banking system than today, as mentioned before. With Shanghai, we will see huge development, and we will see China having financial centres like those in Europe today, such as London or Amsterdam.
Diamond: There is one more thing I would like to add: we have to keep in mind that much of the developed world is either in recovery or heading towards recovery, and we have to consider who is going to be the benefactor of that going forward.
I am not sure that we will see the same dramatic levels of growth that we saw before recession, but China has to benefit greatly as the developed world continues to grow and consumer spending grows.
Taylor: I think deregulation will take longer than five years as it has to be accompanied by a legal framework that is not necessarily strong enough today. I agree with Janet over the role of Shanghai which has been earmarked as China’s financial centre and have no doubts about its future place in the world’s financial markets. Also, we have seen by the events of the last few years that we live in an unpredictable world and if anything this may affect political will in China to move more quickly.
Sargent: Indeed – you cannot bargain for a Middle East crisis or a Russian incident or similar. Let me give you one final set of statistics on this, which is, to a degree, an ANZ assumption. China’s urban population, has risen from 572 million in 2005; and is expected to grow by 2025 to 926 million.
China will have 221 cities with a population of more than 1 million, versus 35 in Europe. 5 billion m2 of road will need to be paved in order for people to get around. 170 mass-transit systems will need to be put in to enable people to move around. There will be 40 billion m2 of floor space in five million buildings, 50,000 of which will be skyscrapers, equivalent to constructing 10 New Yorks.
If I said to you that the house view – as well as my personal view – of China is that it will be driven by a different type of approach, in the sense of an emerged rather than an emerging market with a burgeoning middle class driven by more domestic consumption, I would suggest to you that China, by the early 2020s, will be the world leader when it comes to its economy and its financial services. It will be the single-biggest investor worldwide and, to a greater or lesser degree, the only fly in the ointment that I see, other than the unforeseens, is that with that will have to come with a degree of political liberalisation.