The Chinese economic model that spanned the latter part of the 20th century was simplistic yet highly effective. The nation imported commodities from elsewhere and transformed them into low-value manufactured goods, such as garments, foodstuff and smelted metals. These were either exported abroad or used in the production of other low-value manufactured items that were later shipped overseas.
Coupled with the nation’s high infrastructure spend, this made China the world’s fastest growing economy, with GDP growing at an average of 10% annually between 1980 and 2010, according to the National Bureau of Statistics of China¹.
The last few years have seen a shift in the nation’s economic model, as China’s manufacturing base today sits higher up the value chain. The drivers of this trend are twofold: first, the Chinese government is consciously moving the nation from being a low-value chain economy to one where the service sector has an equal standing; and second, other developing nations are today able to manufacture low-value goods at a more competitive price.
“Most people think of China purely as an exporter, but what they don’t realise is that the nation will soon, if not already, surpass the US on import levels as well,” says Bruce Alter, Head of Global Trade and Receivables Finance, HSBC China.
“China’s rising cost of living, the increasing cost of doing business there, and the nation’s move into higher value industries means that it no longer makes sense to produce many low-value goods in China,” he adds. “Its manufacturing base now imports these from countries like Cambodia or Vietnam, which – in turn – either consumes or re-exports elsewhere.”
Trade and investment flows
Southeast Asia stands to greatly benefit from this new paradigm. Not only does this open up exporting opportunities for manufacturers of low-value goods from the likes of Myanmar and the Philippines, but it also creates demand in China for high value goods and services that are found in Singapore.
This new shift has also boosted investment flows. For instance, today, Chinese companies are opening up manufacturing plants across Indonesia in order to capitalise on its rich commodities base and low-wage labour force. Similarly, Singaporean businesses are meeting China’s need for high-value services in sectors like marketing, IT, healthcare and management consulting. Indeed, all of the above present business opportunities for ASEAN-based businesses, which are widely predicted to grow over the next decade and beyond.
“The fact that China is upping its investment into ASEAN is proof that it sees the region as an important one,” says Alter. “Not only are Chinese companies investing in manufacturing, but they are also investing in infrastructure, such as ports, telecoms and transportation.”
Helen Wong, Deputy Chairman, President and CEO, HSBC China, adds by saying, “This allows them to export these goods elsewhere or simply ship them back to China.”
“There is a significant number of ASEAN-based businesses going into China. Places like Kunming and Nanning in the Southwest of the country are trying to attract interest from Southeast Asia. They provide land and other incentives for foreign investors. And, so far, they have been successful at drawing businesses,” says Wong.
Role of the RMB
Bilateral trade between China and ASEAN topped US$400 billion in 2012, according to official sources. While this figure is significant, it is widely predicted to pass US$1 trillion by the end of the decade. The benefits of conducting cross-border trade using the renminbi (RMB) – as opposed to using the US dollar – are considerable for businesses, particularly those in Asia.
For ASEAN-based importers, settling trade in the RMB can make transactions cheaper, as Chinese exporters no longer require a foreign exchange (FX) margin to cater for currency volatility. Importers therefore can request a discount off the purchasing price. In addition, ASEAN exporters settling trade using the RMB will likely receive their goods sooner than when paying in US dollars, as the funds owed to their Chinese counterparties will likely be processed faster.
ASEAN-based exporters settling in the RMB are also able to use this facility to their advantage when competing against businesses that trade solely in US dollars. “If you can settle in RMB but your competitor cannot, then there's a strong chance you will win the purchase order,” remarks Alter.
Currency swap agreements between China and the top-four economies of Southeast Asia – Indonesia, Malaysia, Singapore and Thailand – have allowed local banks to offer RMB-denominated products to customers. However, the RMB is not yet fully convertible, as it can only be used for international trade settlement and a limited number of investment instruments. While this remains a hindrance for those seeking RMB-denominated investments, the currency’s full convertibility is expected in the mid-term.
“The general consensus among the banking community is that full convertibility will happen within five years,” says Wong. “In the meantime, what’s important to investors is that the process of liberalisation has begun. And, as we have seen with trade settlement, once this starts it is only a matter of time before full convertibility is realised.”
The economies of ASEAN and China are forecast to grow annually at rates of between 5-6% and 7-8%, respectively, over the next few years, according to the World Bank. In addition, trade between both of them is widely expected to grow during this time. This presents an array of opportunities for ASEAN-based companies looking to capitalise on China’s new economic model.
Manufacturers of low-value goods from places like Cambodia, Myanmar and Vietnam have the opportunity to capitalise on China’s increased need for such items. Similarly, high-value business and services found in Singapore can take advantage of new openings arising in these segments in China. In addition, as China continues to invest in ASEAN, local businesses also have the opportunity to service Chinese companies setting up operations across Southeast Asia.
While Sino-ASEAN trade and investment continue to grow, so too will the use of the RMB. Not only is it expected to be used as a foremost currency to settle trade between China and ASEAN, it is expected to become a fully convertible currency in the foreseeable future, which will open up a multitude of new investment opportunities.With its founding roots in Asia, HSBC can advise businesses from Southeast Asia and beyond on where further opportunities lie in China, as well as advise local companies on how best to achieve their regional ambitions. As one of the first banks to introduce RMB-denominated products in the region, HSBC can also advise businesses on how best to trade using China’s currency.
“The best way to learn about doing business in China or using the RMB is to speak to us. HSBC is the link between businesses in China and trade counterparties around the globe. It is our role to make sure that transactions are a ‘win-win’ for everyone,” adds Alter.
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