China has become a key growth market for Canadian companies, with exports to the country expected to grow 11 percent, and imports expected to grow 8 percent, according to the most recent trade forecast data from HSBC , in the next three years. So what should Canadian firms know before pursuing trade with China?
HSBC’s recent China Update webinar featured three experts, each of whom shed light on China's economy, what a new Chinese currency hub in Canada means for trade, where the export opportunities are for Canadian firms, and why Canadian firms need to embrace the opportunity.
China is already one of the biggest exporters in the world, and it's also overtaking the United States in imports, noted Candy Ho, Managing Director, Global Head of RMB Business Development, HSBC Markets (Asia) Limited. The country is also Canada’s second largest trade partner, behind the United States, with transactions increasing 57 percent between 2007 and 2012. In July of 2014 HSBC published a survey of 1,304 businesses in 11 markets – including approximately 100 businesses in the manufacturing, retail, construction & engineering, metals & mining, food & beverage, pharmaceuticals & health care and other sectors, in Canada – on their usage and expectations of the RMBA recent HSBC survey found that 74 percent of surveyed Canadian corporations are expected to increase trade with China by July 2015.
John Zhu, Greater China Economist for HSBC Global Research, told attendees that recent news of China's economy slowing down from its double digit growth shouldn't frighten Canadian firms. “Although China’s growth has slowed down, it’s strong by any standard and [the country has] made progress since it began economic reforms,” he said. “Its economy can handle stress in a better way.”
In response to a question about why some analysts have a negative outlook on the potential for China to grow more quickly in the short term, Zhu noted that although the Chinese government is concerned about deflation and sees its slowing economy as a potential risk to the labor market, the Central Bank, and policy makers in China aren’t going to ignore those concerns.
The RMB Trading Hub
A trading hub in Canada was recently designated for China’s currency, the renminbi (RMB). This hub will help to create more opportunities for trade between the two countries. Canadian firms that start using the RMB for business with Chinese firms may see financial discounts, Ho said. Additionally, when Canadian companies importing from Chinese suppliers use the RMB, banks can handle the foreign exchange rate conversion immediately upon agreeing to a deal. “Establishing an RMB trading center can boost trade flows and encourage expansion and diversification of Canada’s capital markets,” Ho said. RMB trading hubs in other areas of the world, such as Singapore and London, have already seen use of the currency grow.
Despite growth in imports, Canadian firms have made little use of the RMB in trade. Only 5 percent of those surveyed use it in trade, well below the global average of 22 percent. However, 37 percent of Canadian firms surveyed expect to use the RMB in the future, according to HSBC’s survey.
Trade Opportunities for Canadian Firms
Of Canadian provinces, British Columbia and Newfoundland and Labrador have had the largest share (more than 30 percent) of exports to China1, noted David Watt, Canadian economist, HSBC Bank Canada. Alberta and Ontario account for 60 percent of Canada’s total exports, yet very little of what is produced or extracted from the ground ends up in China, he added.
Watt sees opportunity for Canadian companies to increase exports of several goods to China, including raw materials, agriculture, lumber, technology, transportation, biotech and pharmaceuticals. Crude oil, Canada’s largest single export, currently accounts for less than 1 percent of its exports to China1. Canada doesn't yet have an infrastructure to export oil to China, but the Canadian government is taking the steps necessary to build the framework.
Lumber as an export took off after rules were set for wood-frame construction in China. “That shows when we have clarified rules and structure between Canada and China, there is great potential to develop more trade in greater lengths,” said Watt.
Two additional drivers of increased trade between Canada and China are the recently-ratified Canada-China Foreign Investment Promotion and Protection Agreement (FIPA) and the Renminbi Qualified Institutional Investor Program (RQFII). The Canada-China FIPA reduces the risks faced by Canadian businesses investing overseas, and draws foreign attention by showing that Canada is a safe investment. The agreement also provides the ground rules for dealing with direct investment between China and Canada, preventing arbitrary actions by one country against an investment in the other. Through the RQFII, Canada was given a quota of RMB50bn, which translates into direct access to China's capital markets for Canadian institutional investors. The RQFII program is a major step toward liberalization and more China-Canada investment opportunities.
There’s been a sea change in the economic relationship between Canada and China. Canada would do well to think of China as an opportunity, rather than with suspicion, Watt noted, urging the audience to think more broadly. “Canadian businesses, instead of wondering about the U.S. consumer, need to think about the Chinese consumer and the Chinese economy,” he said. “We know trade barriers are going down around the world. It’s only going to get more competitive and we have an opportunity right now that allows Canada to benefit quite remarkably.”
Learn more about RMB solutions from HSBC
1. Source: Industry Canada, HSBC
About the RMB Survey
HSBC commissioned Nielsen to conduct a market survey of 1,304 international companies that currently do business with Mainland China or are a business in Mainland China that imports/exports outside of the region. The survey was in field between 3 April and 7 May 2014 and was undertaken to understand clients’ attitudes towards using RMB, reasons of using / not using RMB for trade and investment activities, as well as other insights they can offer about the RMB.
The research surveyed international businesses in Australia (n=100), China (n=200), Germany (n=100), Hong Kong (n=200), Singapore (n=100), the UK (n=100), the USA (n=100), Canada (n=100), Taiwan (n=100), France (n=100), and the UAE (n=100). Of the companies surveyed, approximately 50% had an annual sales turnover between of US$3M-50M, 40% had a turnover of US$50M-500M and 10% had an annual sales turnover above US$500M. (Copyright © 2014, The Nielsen Company)"
Nielsen N.V. (NYSE: NLSN) is a global information and measurement company with leading market positions in marketing and consumer information, television and other media measurement, online intelligence and mobile measurement. Nielsen has a presence in approximately 100 countries, with headquarters in New York, USA and Diemen, the Netherlands.
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