Q: China is a formidable economy, both as importer and exporter. But has it peaked?
Amy Zhuang: There’s no doubt that China’s economy is slowing – the days of double-digit annual growth are gone. This is a result of fundamental structural issues. The working-age population is declining; consumer spending accounts for an unusually low share of the economy; the debt level is unsustainably high; and the economy is heavily dependent on public investment in manufacturing and infrastructure. But firms trading with China should not be overly concerned about a major economic collapse: China is a tightly managed economy, and we anticipate stable growth of around 7.5% per annum is realistic. And although it will take several years, reforms are gradually being introduced to rebalance the economy.
As a market, what does China mean for Nordic companies?
China’s imports are fairly diverse. It is the world’s largest consumer of commodity products. For example, it buys 60% of the world’s iron ore. It’s the world’s largest consumer of oil. It also buys huge amounts of gas, agriculture products, and manufactured goods. While imports from the Nordics have increased significantly in recent years, trade between China and Nordic companies is still relatively small, both in total volumes and percentage of trade. For example, only 5% of Finland’s total exports go to China.
What do you consider as the biggest opportunities for Nordic companies?
Looking ahead, we believe that the changes in China’s economy will benefit Nordic exporters. Chinese consumers are increasingly looking for quality goods from around the world – and Nordic firms have a reputation for quality. But undoubtedly China’s imports will continue to be dominated by commodities.
China will continue to be interested in Nordic raw materials (such as paper) and in high-quality manufactured goods. But we see a lot of Chinese interest in three particular areas:
- The first is quality food. After numerous food scares, and with concerns about pollution, Chinese consumers really value safe food, and they believe that importing it is the best way to guarantee their health. This is an area where the Nordics have a very strong reputation.
- The second is green technology. China is trying to clean up its act in the eyes of the world, and the simple fact is that Chinese consumers associate the Nordics with clean air and having a harmonious relationship with the environment.
- The third is healthcare and wellness, particularly elderly care. China is completely unequipped to deal with its fast-growing population of elderly people. One in three people in Shanghai now are over 60. China needs to build up a workforce and infrastructure of nursing homes and the like, and fast. The Nordics have a strong reputation for welfare.
Undoubtedly interest in and awareness of the Nordics has grown and I see many more delegations from China visiting the Nordics to learn new skills and gather new ideas.
What about China as an exporter?
It should be no surprise that China’s main exports today are manufactured goods – around 90% of the total. This includes cars, trucks and heavy machinery; textiles; toys and other consumer goods. China’s manufacturing sector has always benefitted from the country’s huge pool of cheap labour and lenient environmental regulations.
But China’s businesses are changing the mix of exports toward higher-quality goods. For example, 10 years ago, China’s main export was textiles; today it’s machinery. As a result, the export similarity index shows that China is becoming more like Germany in its exports. As it climbs up the value chain in areas such as prestige automobiles, China is becoming a competitor for the western world.
Does this mean that China is a good destination for, or origin of, foreign direct investment (FDI)?
China is still receiving more FDI than it’s giving, but this will change. China has realised that it will need to invest abroad if it is to rise to equivalent status to the US. So far it has been investing in Africa as the richest source of commodities. That investment is now spreading to the European Union [EU] and US to get access to high technology and industry. In the Nordics, investments vary by country, but they are generally in technology and in the service sector.
FDI into China has also changed in the past few years. In 2004, 70% was in manufacturing, and just 20% in services. In 2012, only 40% was in manufacturing, while 50% was in services. We believe services will continue to get a greater share of FDI.
The renminbi (RMB) is becoming a more important world currency. How do you think Nordic companies should approach it?
From its history as a closed, managed currency, we’ve seen rapid liberalisation of the RMB. It’s now the seventh-biggest currency in overall trade, according to SWIFT data. Around a third of international trades with China now use RMB, whereas even just a few years ago the US dollar dominated. The currency is already fully floating in the Shanghai free trade zone [SFTZ]; we believe that will expand, and that the RMB will become fully convertible, without restrictions, within three years.
For companies planning to perform some trades in the CNY, the important thing is to recognise that currency risk will increase as the exchange rates become more volatile. Businesses should look at how to hedge their currency risks.
What about the risks of operating in China?
The first is that the banking system is very different. The state-owned banks are extremely restricted in the volume of funding and the exchange rates they can offer. This has led to the emergence of a huge unregulated shadow banking sector, loans from which were equal to 100% of gross domestic product (GDP) at the end of 2013.
While Chinese consumers have an extremely strict culture of saving – which has helped the major banks – China’s corporate sector is heavily indebted. Overall corporate debt stands at 145% of GDP. Excess capacity in areas such as heavy industry has led to poor utilisation, eroded prices and therefore hurt profits. For example, 30% of all large steel mills in China are unprofitable. As the state tries to address overcapacity in areas such as manufacturing, we will increasingly see companies become insolvent. And unlike in the past, the state will no longer bail them out. Corporate credit defaults may take down some smaller banks.
In this operating environment, it is worth being cautious about who you are trading with and which banks are used.
The second area of risk is geopolitical. China is subject to some sanctions – for instance, the EU has sanctioned Chinese exports of solar panels because China has blocked similar imports. Indeed, China is very willing to resort to official and unofficial protectionism to guard its most important and developing industries, such as banking and high technology. The inevitable frictions between trading nations could increase as Chinese firms look outwards to make acquisitions. Those tensions would heighten if Europe or the US blocks a major acquisition.
There is little an individual Nordic company can do to influence or prepare for these risks in international relations. It is important to acknowledge them, but ultimately, the Chinese market is too big an opportunity to ignore. Safeguarding yourself from banking risk is far easier – there are numerous trade finance instruments that can minimise your exposure, taking away some of the stresses of international trade.
Further up-to-date market and economic news from China can be accessed here.
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