China settlement, Eastern promises
Mark Bolsom, Head of Dealing at Western Union Business Solutions, the world’s leading non-bank business payments specialist, looks at how small and medium-sized businesses can take advantage of trade opportunities with China
Much has been said and written in recent weeks on the subject of China’s economic slowdown, and many are concerned that the economy is growing at its slowest pace since the second half of 2009.
Small and medium-sized international businesses, however, should not necessarily be dissuaded by a waning Chinese economy. It is, after all, a slowdown of growth, and there are few European politicians who would not give an arm and leg for the growth that China has witnessed since the credit crunch began. Importers and exporters around the world should not forget that China has been one of the great economic success stories of the past 30 years, if not the greatest.
Chinarecorded 7.8 per cent GDP growth in the first half of 2012 and 7.6 per cent growth in the second quarter; a three-year low. The worry lies in the fact that this is down from last year’s 9.3 per cent rate GDP. Yet, even with diminishing growth, China’s rate of growth in GDP for the first six months of 2012 has been light-years ahead of the Eurozone (-0.25%), USA (2.3%) and the UK (-0.35). China’s growth is still the envy of the major Western economies, especially bearing in mind the current global economy.
It should also be recognised in the fact that Chinese authorities have acknowledged the ebb and, as a result, have taken action the reignite the economy. Chinabelieves that an export-led policy is needed to boost growth, and it is aiming to expand its foreign trade by 10 per cent this year. Chinese Premier Wen Jiabao is determined to improve Chinese trade after the economy was hit by the Eurozone troubles and general global economic turmoil. In recent weeks Premier Wen said: “The third quarter of the year is a critical period for Chinato realise the year’s export growth target and we should take targeted steps to stabilise growth.”
This policy reinforces the notion that, for a number of years,Chinahas been moving away from a traditional isolationist position towards more of an international focus. The result is thatChina’s settlement currency, the renminbi, is becoming a major global currency and is being used more for international business payments. With a new, global perspective and an emphasis on exports, added to pro-growth measures such as aggressive tax reductions and supporting enterprise, China is not only seeking to stabilise its economy, but also to boost it further.
With this in mind, UKand European businesses can look to capitalise on China’s export-centric growth policy. UKimports from Chinahave been substantially higher than UKexports to Chinathroughout the last decade, with the gap widening each year. UKexports to Chinahave grown at a slower pace than imports, but nonetheless more than doubled between 1999 and 2004, and then more than doubled again between 2004 and 2008. UK-based SMEs have been increasingly turning toChina when doing international business.
This increase comes in parallel with the People’s Bank of China’s liberalisation of the Chinese renminbi, which has gathered pace over the last few years. The Chinese government has taken dramatic steps to internationalise its currency, particularly as a vehicle for trade settlement.
Prior to 2009, companies in Chinawere not allowed to settle trade in their own home currency. When an importer paid a supplier in China, largely in US dollars, it was highly unlikely that the supplier actually held a US dollar account. In most cases, the beneficiary of the payment held a local currency account in renminbi, and the dollars were converted into the local currency before being deposited back into the recipient’s account (a payment process that still dominates today). Sending dollars was (and is) relatively easy for a Western importer, but receiving dollars does pose certain risks and potential costs to the foreign supplier and they will price these risks and additional costs into their product.
In 2009, the People’s Bank of China (PBOC) introduced Mainland Designated Enterprises (MDE), a status given to certain companies with government permission to settle trade in the renminbi. The MDE designation and pilot programme grew from 365 companies in 2009 to over 67,000 companies at the end of 2011. Although this growth appears impressive, it is really just a drop in the ocean when considering that there are an estimated 10 million companies inChina.
Following the initial test period of the MDE scheme, in February 2012 the PBOC announced that export and import designated companies inChinawould be able to settle trade in the renminbi. This policy went live earlier this summer, representing a momentous shift in global foreign exchange and trade settlement; the Chinese authorities are now appreciating the merits of having the world relinquishing its reliance on the US dollar as the global default currency and choosing instead to conduct international commerce using the renminbi.
In October 2010, the renminbi was the 35th-most-used payment currency. In July 2012, it was ranked 15th, with 31 countries using the renminbi for at least 10% of their payments with China. This is an impressive jump considering that significant restrictions have existed for much of the period. According to SWIFT, renminbi adoption by the US, Australia and Japan remains slow. There is, therefore, a window of opportunity forUK and European small and medium-sized business to capitalise on the opportunities RMB use offers.
Not only would businesses outside of China benefit from building strong and lasting professional relationships with one of the most promising markets in the world, but direct renminbi payments will also help small businesses reduce their exposure to currency fluctuations. Simply put,UKcompanies now have the ability to price, settle and invoice from sterling straight into renminbi, bypassing the US dollar middleman; British businesses no longer have to wait for transactions to be processed in three different currencies. As a result, a faster, cheaper and more transparent supply chain is encouraged. Chinese suppliers also benefit, through receiving faster tax rebates from the authorities, helping reduce costs in the supply chain while simultaneously protecting profit margins.
Earlier in 2012, our research revealed that nearly 40 per cent of Chinese businesses prefer to receive payments in the renminbi. With this statistic in mind, companies outside of China may well wish to consider direct renminbi payments with their Chinese suppliers. Not only could such a move help improve business relationships, increase profit margins and improve exposure to China’s growth, it is likely to be a move that your competitors have yet to make.
This article has been prepared solely for informational purposes and does not purport to provide any financial, investment or professional advice. It does not in any way create binding obligations on Travelex Global Business Payments Limited, a Western Union Company. Travelex Global Business Payments Limited makes no representation, warranty or condition of any kind, expressed or implied, in this article.
 Source: UK Trade & Investment: http://www.ukti.gov.uk/export/countries/asiapacific/fareast/china.html
 UK Trade Performance across markets and sectors (February 2012); page 25: http://www.bis.gov.uk/assets/biscore/international-trade-investment-and-development/docs/u/12-579-uk-trade-performance-markets-and-sectors.pdf
 Source: SWIFT RMB Tracker, August 2012: http://www.swift.com/resources/documents/SWIFT_RMB_Tracker_August_2012.pdf