Retail politics

Trade fairs often have an outsized impact in China. For instance, eight years ago WiC published a special edition on the Shanghai Expo. That lavish event was deftly positioned as a celebration of China’s arrival on the global stage.

But in terms of economic influence, the long-running Canton Fair has been much more important, heralding China’s emergence as an export giant. The biannual gathering in Guangzhou is monitored around the world: if orders grow it’s a sign that the outlook for trade is robust.

This year’s gathering was scrutinised for signals about the trade row between Washington and Beijing. Export orders from the US were down just over 30% to $2.8 billion, Caixin magazine reported, while the number of American attendees at the fair fell by 4% to just under 11,000.

Jürgen Kracht, the founder of Fiducia, a Hong Kong-based advisory firm, first went to the fair in the 1970s. But what he remembers is its initial role as the only place where trade officials could meet foreign firms to discuss China’s import needs. “Representatives from companies like ICI and BASF would each be given a table and the officials would move between them, looking for the best price for the items they wanted,” he told WiC in another of our special editions, this time on the Pearl River Delta.

Kracht says that many of the international firms left the haggling to middlemen, like his employer of the time, and sometimes didn’t even bother to attend. “It seems ironic from today’s viewpoint, when China is regarded as a must-have market,” he acknowledged. “But back in that era it was different. Most Western firms weren’t very interested in China because the market was too small.”

The Canton Fair started in 1957 and in the decades that followed it became more known for China’s growing export-led economy. Its official name was the China Export Commodities Fair and it attracted buyers from around the world.

But times have certainly changed and unlike Kracht’s early experiences international firms now clamour for contact with China’s consumers. And as the name suggests, this week’s inaugural China International Import Expo (CIIE) in Shanghai was an attempt to make it easier to reach them.

Of course the CIIE also comes at a time when China is under growing pressure to open its markets further, not least from the Trump administration, which is waging a trade war against practices that it deems unfair and uncompetitive. So what happened in Shanghai? Did China succeed in rebranding itself as the answer to other nations’ trade deficits?

Firstly, the politics…

At least 400,000 buyers from China attended the week-long event, according to official figures, with 3,600 companies exhibiting. Hotels were booked solid and there were long queues to get into the expo halls in the Hongqiao district of the city.

The political messaging was crystal clear in the area surrounding the expo’s cavernous venue, which was plastered with billboards promising a “New era, with a shared future”. The slogan seems inspired by ‘Xi Jinping Thought’ (see WiC385), which calls for a “new era” that envisages China striving for “a shared future for humanity”.

Security was tight on the opening day, largely because the Chinese president attended and gave the keynote speech. In this he again positioned his government as a defender of globalisation. “Protectionism and unilateralism is rising. Multilateralism and the free trade system are under threat,” Xi warned, clearly wanting to contrast China’s approach with that of the Trump administration. “China will not close its door to the world and will only become more and more open.”

The response from stock markets and much of the foreign media was underwhelming. For a start, there wasn’t much new in what Xi announced, although he did increase the target for foreign goods that China would buy over the next 15 years, promising more than $30 trillion of purchases.

This forecast was revised upwards from a target of $24 trillion first set by the Ministry of Commerce, with Xi adding that another $10 trillion in services would be imported over the same period.

The numbers sound huge but they aren’t transformational, most analysts think, implying an average of $2 trillion of imports a year to 2033, versus the $1.8 trillion that the Chinese purchased last year.

Earlier this year Xi had announced that the Chinese would cut tariffs on foreign imports in areas ranging from anti-cancer drugs to baby strollers and mineral water. In his address at the CIIE, he also touted new free trade zones and reiterated that China would reduce foreign ownership caps in sectors like medical services and education. But he stopped short of announcing concrete measures to open up industries like energy and telecoms.

China’s critics certainly need a lot more convincing, including foreign business associations that have been calling for a fairer market for importers for years. They argue that they have heard such promises before but that the proof is going to be action on the ground.

There wasn’t much enthusiasm from governments about coming to the expo either. Eighteen heads of state were expected to make the trip to Shanghai, Bloomberg reported. But there were no high-level attendees from China’s main trade partners, bar the Russian Prime Minister Dmitry Medvedev.

Foreign companies did turn up in decent numbers, including 180 firms from the United States such as Qualcomm and GE. Here there were signs of trade fair fatigue too, with businesses generally sending their China country heads rather than their top bosses. Starbucks chief executive Kevin Johnson didn’t put the expo in his diary even though he was in Shanghai, Bloomberg claimed.

How worried are businesses by the trade tensions?

There was very little mention of tariffs or trade war among the large Australian delegation staying at the same hotel in Shanghai as WiC, where the conversation was about the prospects for agribusiness exports like wine and seafood, and visits by larger numbers of free-spending Chinese tourists.

Three of the businesspeople in the group said that it was their first trip to Shanghai but that rising revenues from China had convinced them that the CIIE was worth the effort.

All of this was anecdotal but the more detailed findings of HSBC’s latest Navigator survey on trade sentiment, which was published this month in anticipation of the expo, were broadly in line with the upbeat Australian mood.

The results pointed to an underlying sense of confidence on cross-border trade, according to a group of senior executives from HSBC who attended the expo, with 78% of the businesses surveyed describing themselves as positive about their worldwide commercial prospects.

Natalie Blyth, HSBC’s global head of trade and receivables finance, told reporters at a press conference that she was encouraged by the findings, identifying a spirit of “optimism and adaptability” that should serve exporters well.

She added that advances in technology are making supply chains more nimble and more resilient, which is giving buyers and sellers more confidence about navigating the challenges triggered by the tariff row.

Stuart Tait, head of commercial banking in Asia-Pacific, said that he was having similar conversations with clients on the sidelines of the trade fair. Companies were pleased with China’s earlier announcement that reduced tariffs for some foreign imports, although they hoped to see them relaxed on a wider range of goods. And although there was acknowledgment of uncertainty in parts of the trading world, there was no sense of panic from businesses.

“After all protectionism is hardly new – and business and trade always finds a way,” he added.

Time to look at the bigger picture?

Another interesting finding in the Navigator report is that 31% of respondents didn’t think the US-China trade dispute would have much of an impact on their business.

Indeed, almost a third of firms (especially those from South America, Africa and the Middle East) thought it could help their companies. Perhaps that’s because they hope to gain market share, the study suggested, although it cautioned against overlooking the potential knock-on effects that the trade row could have on the supply chain, or its wider implications in curbing global growth.

Moving the focus away from the trade row, Helen Wong, HSBC’s chief executive for Greater China, spoke about the deep-seated forces reshaping the Chinese economy, including urbanisation, the millions of newly affluent ‘middle-income’ consumers, the rise of cross-border commerce and the digital economy.

Recognising these trends, HSBC has also published a ‘Made for China’ supplement to the Navigator study, reviewing how 1,205 companies in 11 key markets were looking at the new opportunities.

At headline level there was similar optimism to that seen in the global survey, with nearly half the businesses that already sell to China identifying it as a top-three market over the next three to five years.

Surprisingly these expectations were strongest among respondents from the United States, with 58% of American firms classing China as their top target. And for those US firms in the survey that don’t currently do business in China 40% think that it will become one of their most important markets in the future as well.

These kinds of findings play to a more nuanced view of the trade war than the headlines in the newspapers (one caveat: the survey was conducted before the Trump administration levied its latest round of tariffs on Chinese goods in the autumn).

The study also focused on the significance of younger consumers, with 62% of companies talking about people born in the 1980s and 1990s as their most important customers (a group loosely titled as millennials in most demographic studies).

Another 23% of firms are targeting the cohort born in the following decade as the biggest spenders.

As HSBC’s Wong pointed out, these customers are demanding quality products and are prepared to pay higher prices for them.

This is called ‘premiumisation’ in marketing speak and it is a powerful factor in opening up new opportunities for importers to China.

A case study is avocados, a beloved breakfast (on toast) for hipsters in the world’s trendiest cities. As we first mentioned in WiC276, the Chinese are starting to like them as well and avocado sales are forecast to double this year, fuelled by demand from younger customers in larger cities like Shanghai, Beijing and Guangzhou.

The growth in imports has been huge: about 32,200 tonnes of the fruit arrived from Chile, Mexico and Peru last year, or more than a thousand times the amount in 2011.

Another of the hotspots is seafood, where new markets have been opening up for exporters. As of July, lobsters were accounting for 70% of New Zealand’s seafood exports to China, for instance, while sales of Norwegian salmon increased by 548% in the first half of the year.

It’s a similar story in the world of wine – a trend WiC has covered in our Little Red Book series – where China has emerged as one of the world’s largest markets. Imports approached $3 billion last year, up almost a fifth on the year before.

So it’s a new chance for the world’s exporters to profit?

For years capital equipment and commodities have featured as China’s largest import flows. In 2017 mechanical and electrical products still accounted for almost half of total imports in value terms. Many of these goods are absorbed by the country’s gigantic export machine, reappearing in the sales of finished items to other markets.

What’s different about the CIIE is that it has been promoting the kind of imports that end up with Chinese consumers and which aren’t reassembled or reprocessed for further sale overseas.

That’s not to say that the foreign brands are going to get a free ride in chasing local customers. It’s no longer true that goods from overseas are must-haves simply because of their international origin. Indeed, competition from local firms is increasingly intense because Chinese firms have closed much of the gap in product quality, making the choice of a homegrown brand an easier decision than in the past.

Ten years ago few Chinese wanted a domestic smartphone brand. But companies like Huawei and Oppo have transformed perceptions in their home market, capturing a growing share of sales.

There are still cases where foreign brands enjoy an edge, most notably where quality and safety are key determinants in consumer choice. Infant milk formula is one of the best examples. Food is another fertile area for firms looking for an advantage in goods that are new to the Chinese or underserved by domestic competitors (not just avocados, but cherries from Chile and tree nuts from Australia: see WiC294 and WiC371 for how changes in diet are benefiting farmers).

More broadly, foreign firms know that competition for younger consumers means that they have to find a way of standing out from the crowd: 37% of the exporters in the HSBC ‘Made for China’ survey identified having distinctive or superior products as the most important factor in delivering more sales.

A good example is Japan’s Shisheido. As we pointed out in WiC423, the high-end cosmetics maker saw its profits in China rise 125% in the first quarter to $125 million. At that rate of growth the Chinese market could soon deliver more than $1 billion of annual net income.

How strong are consumer sales at the moment?

The backdrop to the expo is that consumer sentiment in China has actually been weakening. Monthly retail sales – a proxy for domestic consumption – have slowed from average growth of 10.2% in 2017 to 9.3% in the first nine months of this year.

That has spurred questions about the sustainability of the ‘upgrade’ in consumer spending that companies have been celebrating. Naysayers seem more convinced that people are starting to search for cheaper options, citing the popularity of e-commerce platforms like Pinduoduo, which pitches goods at discounted prices. Claiming that millions of Chinese are tightening their belts rather than opening their wallets (see WiC425), the critics also highlight trends like the skyrocketing cost of housing, which means that discretionary income is being sacrificed to higher rents and mortgage payments in many cities.

Asked by reporters about the ‘downgrading’ trend, HSBC’s Blyth said that she is seeing similar behaviour in other markets. However, it is often two distinct spending decisions from the same consumer: someone who is ready to pay more for quality goods or services, but who wants to shop around on price for more commoditised ones. “It’s not as straightforward as two markets heading in different directions. The same consumers are active in both,” she explained.

Another counterargument to the story of slowing sales is that there is still so much scope for increased spending in China, especially as lesser developed cities start to get as affluent as their peers in coastal provinces. The potential for car sales in some of these cities is a case in point, despite a slowdown in the sector over the last few months that has weighed down the numbers for retail sales in general. An alternative approach might look at the scope for the car market to grow over the medium-to-longer term. Ownership levels were just 180 vehicles per 1,000 people in China last year, a huge disparity on the 600 in Japan or the 800 in the US. (Tesla was one of the US firms with a big stand at the CIIE.)

Yet perhaps the most convincing argument about the significance of the consumption story is that it is just as crucial for Chinese policymakers, because of the need to shift the economy away from its traditional reliance on investment and exports for growth.

Over the medium term imports have already grown substantially, with China now the world’s second-biggest importer, accounting for more than a tenth of the global total, or more than three times its share at the start of the century. And domestic consumption is now proving much more pivotal to China’s economic well-being, contributing 78% of the increase in GDP over the first three quarters of this year, according to estimates from HSBC.

Perhaps it also should be said that where Xi Jinping personally endorses a campaign – as he did by opening the import expo – results usually follow…

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