Learning how to do business to increase trade flows with China

If Chinese provinces were national economies, six would be G20 countries, writes CLIFFORD COONAN in Shanghai

If Chinese provinces were national economies, six would be G20 countries, writes CLIFFORD COONANin Shanghai

DISEMBARKING from the high-speed train in Shanghai’s Hongqiao terminal, after a four-hour 45-minute journey that used to take over 10 hours, a custom-designed taxi whizzes you to the super-luxurious Grand Hyatt in Pudong, Shanghai’s newly built central business district across the Huangpu river from the old city.

Here in China’s trade capital at the end of last month, the British- Hong Kong bank HSBC gathered 30 businesses from all over Europe, including two Irish companies, to the Grand Hyatt for an event called the Trade Exchange. This will tell them of the opportunities that exist to do business with or in China.

At this stage, most of the companies are already impressed with what China has to offer. The executives already know that China has re-emerged as the world’s second-largest economy and the biggest global exporter.

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Trade flow between Europe and China has increased dramatically in recent years and China is now Europe’s second trading partner behind the US and the biggest source of imports – a staggering €214.7billion in 2009.

They are keenly aware that the EU imports mainly industrial goods from China: machinery and transport equipment and manufactured goods. Now they want to know what comes next.

“I knew this before I went to the Exchange conference but the size of the market and the size of the opportunity still amazes me,” says Pat Duane, vice-president of corporate development at Creganna-Tactx Medica. In addition . . . it still has so much growth potential.

Among the predictions that particularly strikes Duane are that the Chinese economy will be eight times bigger by 2050, with still room for growth as living standards will still only be one third of the US.

In his presentation to the gathering, HSBC senior economist Mark Berrisford-Smith points out how China is now Brazil’s biggest market, and will soon be Germany’s, and there is strong potential for growth given that China’s living standards are only one seventh of that the United States on a purchasing power parity basis.

“In 2000, there were three provinces with GDP over more than $100 billion,” he says. “In 2009, most Chinese provinces had economies worth over $100 billion. By 2020, six Chinese provinces will have annual GDP above $1 trillion.” To put this into context, if Chinese provinces were national economies, six of them would be G20 countries.

“By 2020, the Chinese should successfully soft-land,” Berrisford- Smith adds. “The key short-term priority is the containment of inflation.”

He says the current model of investment-led growth is unsustainable and a key challenge will be to see whether the national government can dampen GDP-focused competition between provinces and cities.

In his view, China still has the potential to enjoy several decades of strong growth and, in the next decade, some Chinese cities will attain European prosperity levels.

Irish Dairy Board financial director Cathal Fitzgerald says the IDB is targeting interested Chinese companies for long-term connections. “There is room for much expansion of course,” he says, “but China is already a mature and knowledgeable market for quality dairy products.

“We’re seeking to introduce Chinese consumers to an aspect of Ireland with which they may not yet be familiar. To do that, we first have to establish if there are any companies willing to enter into a collaboration or joint ventures with Irish dairy companies to develop opportunities in China.

“Similarly,” Fitzgerald adds, “we’ll be seeking to engage with Chinese companies who want to explore investment opportunities in the Irish dairy industry.”

Part of the reason for the Irish Dairy Board attending the Trade Exchange is to learn more about the specifics of business in China. “Building knowledge through linking with Chinese industry will improve our contextual understanding of doing business in China,” Fitzgerald says.

John Casey, head of commercial banking, Continental Europe, at HSBC, says there is a growing awareness within the euro zone that domestic consumption is not where you will find growth and companies are waking up to the opportunity in China.

“The idea is to have a better understanding of navigating that opportunity,” Casey says.

There are, of course, challenges. One that has been consistently pointed out is that of protecting one’s intellectual property. Piracy and IP theft is a regular bugbear mentioned in annual reports by the EU and the US chamber of commerce.

“On intellectual property, it’s about risk mitigation,” Casey adds.

“People coming into China have a greater awareness and recognise the opportunities. You’ll have these issues in all markets but you go through the same thought process and protection process.”

Liu Xiaoguang of the Beijing Capital Group says China still offers vast potential for growth, but he points out some pitfalls.

“The demographic dividend is disappearing. China’s labour force will decline after 2015. There is pressure on environmental resources. The irrational structure of demand is something that China is facing right now. The focus is expanding domestic demand, upgrading traditional industries. China is really big and it’s hard to balance growth across the regions.

“However,” Liu adds, “China will continue to play the role of the world’s manufacturing centre for the next 10 to 15 years. Will the Chinese economy have a hard landing? I don’t think we need to worry. Our debt-to-GDP ratio is still one of the lowest in the world.

“If China wants to grow, it must import foreign technology and corporates. The Chinese government is working on policy to open up restrictions. As the Chinese government opens up, the investment environment will become better and better.”

Montgomery Ho, HSBC’s head of commercial banking in China, says the focus of his bank’s activities in the country was to try to help increase the trade relationships going out, help to acquire technology and acquire brands and acquire natural resources to support industry in China.

“We have connections and we believe our international connectivity is our advantage,” Ho says. “We understand that China is a big market and requires a lot of finesse for administration.

“You have to understand your customers and be a good corporate citizen,” Ho adds. “Do business in a prudent manner – for us this is not an additional burden.”

TRADE EXCHANGE CONFERENCE: THE KEY TOPICS

Five-year plan

China’s 12th five-year plan for 2011 to 2015 is aimed at achieving a more balanced approach to growth and development. Its main focus is on environment, people’s livelihoods and “administrative reforms”.

The plan harks back to the Soviet era but it is crucial as a blueprint, or road map, for growth in China.

“The 12th five-year plan moves away from hard engineering toward domestic innovation and aims to move China up the value chain – away from clothes towards solar panels,” said Pat Duane, vice-president of corporate development, Creganna-Tactx Medical. “It is focused on rebalancing by increasing domestic demand, developing the service economy, reducing dependence on imports and improving infrastructure and healthcare.”

Tier two and tier three cities

Increasingly the smart money is moving away from the tier one cities in China, which include Beijing, Shanghai and Guangzhou, towards tier two and three cities.

These have huge populations, great infrastructure and offer major opportunities, but are often ignored by foreign investors because they are relatively underexplored. Tier two cities include Chengdu, Dalian, Nanjing, Qingdao, Shenzhen, Suzhou and Tianjin. Third tier cities include Changshu, Wuxi, Dandong, Jinzhou, Datong, Foshan, Shantou and Jiangmen.

RMB settlements

Both HSBC and its rival Standard Chartered, as well as Citibank and others, have been active in promoting the use of the renminbi to corporate customers instead of the dollar for trade deals with China, offering discounts and other incentives to encourage customers to settle in RMB.

China is keen to boost international use of its currency and banks started renminbi trade settlement operations in 2009.

“RMB settlements are a huge opportunity,” said John Casey, head of commercial banking, continental Europe, at HSBC. “Clients are going through an education process on settlements.”