13 Kasım 2015 Cuma

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Look East for Trade Success

It's difficult to ignore the astounding growth of the Chinese economy—the fastest growing in the world and ripe with opportunity for foreign trade and investment. However, many Canadian companies are ignoring the opportunities available with China, preferring to focus on trade with the United States and on trading with the US dollar.

As China continues to implement monetary reforms and Chinese businesses and consumers demand more foreign goods, Canadian businesses can boost their bottom lines and help fuel the still-struggling domestic economy by capitalizing on Chinese opportunities. In the second quarterly webinar in HSBC's “Fueling Growth Worldwide" series, economic experts discussed the opportunities presented by China and how Canadian businesses can take advantage of the growth potential offered by the world's fastest growing economy.

“We need to overcome our aversion to trading with China," said David Watt, Canadian Chief Economist at HSBC Bank Canada. “That's where the opportunities lie and where the growth is going to come from."

China's expanding economy

For several years, exports were the drivers behind the exponential growth of China's economy. But today, the Chinese market has matured into an economy that is driven by domestic demand, said John Zhu, Greater China Economist for HSBC Global Research. This year, the Chinese government expects 7 percent GDP growth*.

“For the past four or five years, China's growth has been driven by consumption and investment," Zhu said. “The structure of the Chinese economy has changed, and growth will increasingly come from domestic demand."

While China is beginning to deal with overcapacity in commodities and deflation, the government has “lots of policy flexibility," Zhu added. Because the government has maintained a disciplined approach to budgeting, it can overcome issues with traditional measures such as adjusting interest rates.

China is encouraging foreign investment with its “New Silk Road," a modern transit, trade and economic corridor being constructed that will resurrect the ancient trade routes running from Shanghai to Berlin. The country is also continuing to implement currency reforms to make its renminbi (RMB) into a global currency. “China is not just aiming for one or two policy tools," Zhu said. “They have a whole package of tools to be aware of and lots of policy options for continuing to grow the economy."

Opportunities for Canadian business

For Canadian companies, one of the most important Chinese policy changes to date was the passage of PBOC Rule 168 in July 2013. This new rule allows for payments for goods and services to be made in RMB both onshore in China and offshore outside of China

“The rule was introduced to tell the world, 'Look, we're opening up RMB and we want it to be used around the world,'" said Debra Lodge, North America head of RMB for HSBC Global Markets. For Canadian companies trading with China, the ability to use RMB can eliminate foreign exchange risk and fees, allow for forward hedging, and provide opportunities to do business with additional suppliers. In addition to paying for products in RMB, Canadian companies can benefit by using RMB for intercompany loans, additional capital infusion and foreign direct investment, Lodge said.

One HSBC client, a North American importer of bath and bedding products, went to China to talk to suppliers to see if they would accept RMB. After convincing his suppliers to try trading with his company using their local currency, the business owner began hedging out two to three months. Within six months, he had saved US$200,000, Lodge said.

“We need to overcome our aversion to trading with China," said David Watt, Canadian Chief Economist at HSBC Bank Canada. “That's where the opportunities lie and where the growth is going to come from."

The use of RMB is no longer new; it's been allowed since 2013 and many large companies are moving forward with it, experiencing benefits, Lodge added. Documentation in China is simpler when using RMB than US dollars, and companies still receive the same tax rebates. Due to the trade relationship between Canada and China as well as developments like the RMB Trading Hub in Canada, “Canadian companies are very lucky because they can open accounts in RMB; I wish I could offer that to my US-based clients," Lodge said.

Changing trade focus

Economists are not quite optimistic about the Canadian economy, or the North American economy as a whole, so looking at Eastern opportunities is more important than ever. “We are likely closer to the next recession than the last one," Watt said. “US growth has tended to disappoint economists in recent years, as forecasts are regularly revised downward. We can't expect the US to step up and carry growth for Canada, which reinforces the idea of looking elsewhere."

Because of China's rapid and ongoing growth, it is an ideal option. “We have to look at exports for growth," Watt says. “The federal government has been doing a good job of negotiating trade agreements and investment agreements and Canadian companies need to take advantage of all these opportunities."

*Source: The State Council of The People’s Republic of China. REPORT ON THE WORK OF THE GOVERNMENT (delivered at the Third Session of the 12th National People' s Congress on March 5, 2015)

Disclaimer

The information presented is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained in this document without first obtaining specific professional advice. While reasonable care has been taken in preparing this document, HSBC does not make any guarantee, representation or warranty (express or implied) as to its accuracy or completeness. The information presented in this document is subject to change without notice.

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