China raises its trade status

China’s shift from producer to consumer is changing the nature of the country’s trade, as well as the strategies of banks that are seeking to capture the trade flows in and out of the country. Opportunities abound in meeting the increasing demands of consumers in China. Meanwhile, the country’s largest companies are expanding internationally and are increasingly being recognised as global brands by the rest of the world’s consumers.

Fears of a dramatic slowdown have dogged China’s economy, but the so-called ‘hard landing’ has failed to materialise. The World Bank notes that China’s growth is gradually slowing as the country restructures its economy from manufacturing to services on the supply side, and from investment to consumption on the demand side. In 2013, output grew by 7.7%, which was the same as 2012’s growth rate, and higher than the government target of 7.5%. The World Bank estimates that economic growth in China will decrease slightly over the next two years, to 7.6% in 2014 and 7.5% in 2015.

Building muscle

Trade accounts for a large portion of the country’s gross domestic product and is one reason why the economic research institution Peterson Institute describes China as a ‘mega trader’. The other factor contributing to China's ‘mega trader’ status is its share of world trade. According to the latest figures from the World Trade Organisation – from the end of 2012 – China accounted for a 11.13% share of the world’s exports and a 9.77% share of the world’s total imports.

That proportion is expected to rise further as China consumes more and the country’s exporters move up the value chain – away from low-cost producers for the rest of the world – to exporting hi-tech electronics, for example. More broadly, global trade flows are also changing as China increasingly trades intra-Asia and with other emerging economies, a topic that James King will explore further in his article in this special report.

China’s banks have also been part of this growth story, and have been steadily climbing up The Banker’s Top 1000 World Banks ranking. In 2014, Industrial and Commercial Bank of China and China Construction Bank took the top two spots in the ranking, with Tier 1 capital of $207.61bn and $173.99bn, respectively. These lenders, along with Bank of China and Agricultural Bank of China, are also the world’s most profitable banks. In this special report, Stefania Palma will look at the strategies adopted by these large banks when it comes to financing China’s trade.

China’s largest companies are also some of the largest in the world and the international expansion of the country's banks has been aligned with the growth of these multinationals. Meanwhile, global US and European banks – seeking to leverage their international network – are having to adjust their way of thinking to cater to the needs of these Chinese champion companies. In the past, such banks followed their US and European clients into China, but now they are also banking clients in the other direction: from China outwards.

Opening doors

The Chinese authorities have supported the international expansion of its companies with its strategy of internationalising the renminbi. Given the increasing share of trade that is done with China it is natural that traders will move to settling their transactions in the Chinese currency. As part of this plan, China has been building its financial infrastructure, payment systems and gradually loosening restrictions on the renminbi so that Chinese companies can be paid directly in the currency.

Although still a small share of total trade payments, the renminbi’s rise has been dramatic in recent years. According to the Society for Worldwide Interbank Financial Telecommunication, South Korea’s use of the currency, for example, increased 563% between June 2013 and June 2014, putting the country in the top 10 countries in the world for renminbi payments value (excluding China and Hong Kong).

The internationalisation of the renminbi has also spread to the China (Shanghai) Pilot Free Trade Zone – as it is officially named – where restrictions on the use of cross-border renminbi have been lifted for certain uses, such as offshore borrowing in renminbi and cash pooling. The zone, launched in 2013, is part of China’s efforts to open up its trade and economy, and in its current state could be viewed as a window into China’s future.