China’s Economic Issues Signal a Change in Import-Export Markets is Underway

Russia, India & South-East Asia To Be Winners As the EU and USA Market Importance Wanes

Amongst all the hyperbole concerning the current concerns of the Chinese economy, it is salient to note that China’s political instability in the mid-late 1980s, an event that culminated in the Tiananmen incident, was far worse. Deng Xiaoping’s discovery that China’s oil reserves were at an all-time low with just two weeks of operating stock left was a huge wake up call for reform, and arguably spearheaded the entire movement of pushing China into becoming a global power it is today. China then was on the point of collapse and at a very real risk of yet another revolution. It is a lesson well learned by the Communist Party. They view their hold on power as being intrinsically linked to securing energy supplies. Hand in hand with that, but to a marginally lesser degree is their ability to keep Chinese consumers content, and gradually building affluence.

The recent retrenchment of the stock markets in China, is as I said earlier in the week is of little long lasting concern to global stock markets. There is no financial link between the value of Chinese listed companies in Shanghai and of international companies listed in New York and London. Mainland Chinese stocks can only be purchased by Chinese and are not internationally traded. The resulting decline in stocks elsewhere is purely a matter of market sentiment and not actual value. Global stocks consequently will, and are, recovering.   

It is also understood that the GDP growth rate of 7 percent from two decades of 10 percent growth doesn’t really signify anything of any great importance. Economies, especially large ones such as China’s, cannot continue to grow at double digit or even high digit rates indefinitely. It is a mathematical impossibility. Concerns over “falling growth” therefore are also grossly misplaced. However, there are problems – and no-one ever said it would be an easy transition – in moving China from an export driven economy to a consumer economy. What is currently happening is a bump along the way.

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The currently slow global growth is also having a negative impact on China as global consumers are purchasing less. However, smart foreign investors have already noticed that China is becoming increasingly expensive, and have been shifting production away to other Asian countries. It is valid to note that while the decline of China’s stock market has hit the headlines, India’s Sensex and Singapore’s Straits Times Index – the latter showcasing ASEAN stocks – are both in the ascendency.  

China’s real problem is getting its consumers to spend, and to be able to match that with the rising prices. To some extent the CCP is responsible, with the guidelines over the raising of wages on a national basis – there has been an explosion of increasing wage demands over the past five years and the introduction of mandatory wage increases on a national basis. The rise in operational costs has not matched the inevitable rise in consumption costs. Chinese companies, who are keen to make money from the new boom in middle class affluence, have had the effect of raising the level of purchasing of even local products to too high a level. What should have been a consumer boom – because everyone has more money – has instead turned into a period of austerity. The CCP will need to figure out how to rebalance that aspect of economic society.  

China is however already in the process of creating new markets, to both purchase goods from and supply them. That process is largely built on the development of the Silk Road Economic Belt. The fact that it is a long-term project that can both be controlled by Beijing and will provide return on investment in stages over the years is also a benefit, as it assists with keeping China’s growth targets on schedule and thus additionally impacts on other important areas in national reform.

The new Silk Road will bring China closer together with South-East Asia, India as well as Russia and Central Asia. A mixture of both securing energy supplies as well as creating trade opportunities, China’s Ministry of Commerce has already stated that it has created trade volumes of about US$485 billion during 2015, and will account for a total of nearly 28 percent of its total export trade for the year. That figure can be expected to grow even further in the future, as China shifts its export policy to markets in emerging Asia rather than to the West. The EU and United States can, in effect, be left alone to concentrate on each other. China, meanwhile, wishes to control Eurasia.     

China’s trade with ASEAN has also been growing this year, albeit at a rather more modest rate of 1.6 percent, and reached US$224 billion in the first six months of 2015. The year ends AEC compliance deadline, at which Vietnam is expected to reduce tariffs and come into compliance with the China-ASEAN Free Trade Agreement, will boost China-ASEAN trade significantly in 2016 – simply because countries such as Vietnam can now manufacture goods at a much less cost than in China and will, from 1st January 2016, be able to export them to China at zero duty. 

Growing trade ties with India also bode well for the region. The bilateral trade is expected to hit US$100 billion this year and the projects recently signed off between the two countries run into the billions.  

China will be concentrating on keeping its own population content over the next decades, meaning opportunities arise for foreign investors involved in the human aspect of better health care and so on. Chinese consumers will require – and be given – the access to a greater amount of product choice from new supply chains, than ever before. Products from Russia, the EAEU, India and South-East Asia will all increasingly find their way into shops, creating opportunities for repackaging, warehousing and new distribution chains. The reverse will also ring true as more Chinese products make their journey west to Central and South-East Asia and beyond. These changes mean that China’s service industry will also expand and develop to meet these needs. It also means that attention to price points needs to be made: some goods and consumables now popular as Foreign and Chinese brands consumed in China will become obsolete when faced with cheaper imported competition. The Chinese consumer in 20 years will have far more choice than ever before. Understanding what they will be buying and these trends will become a huge subject of interest, and increasingly one that will require Russian, Indian and Central and South-East Asian expertise to navigate.

In short, the supply chain is dramatically shifting, as is China’s reliance on markets in North America and Europe, something which the majority of analysts and corporate businesses have yet to grasp. Rather than be subject to the whims of global trade, being held accountable by World Trade Organization arbitration and the fear of US sanctions (as has recently occurred in Russia), possibly coming as a result of a potential future clash in the South China Sea for example, China is seeking, longer term, to play its global trade terms in an environment it can exert influence over. That means the establishment of the Silk Road Economic Belt is of profound importance. International investors looking at China for future growth will need to factor in how to take advantage of Asia and Eurasia as an entire region, and no longer be purely content on their own markets in the United States and Europe. China is changing the game, and both its economy and that of global trade patterns are changing with it. It is little wonder that there are bumps along the way. But what is happening is not the beginning of a global recession. It is the beginning of a changing landscape in how, where, and whom China chooses to trade with. Corporates in the United States and EU need to be fully aware of these dramatic changes and adapt accordingly to take advantage and stay abreast of these monumental changes. China’s future trading patterns have already been announced. Has the West really been listening?

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