Economy

A market that matters

HSBC’s latest trade survey showcases the rise of China’s consumers

Stuart-Tait-w

China’s consumer market is changing fast, says HSBC’s Stuart Tait

Xi Jinping was back in Shanghai on Tuesday to open the second China International Import Expo, a major trade convention that promotes the country as a buyer of the world’s goods.

The Chinese media championed the gathering, predicting more than 500,000 visitors over its six days, or more than twice as many as last year’s inaugural session. However, the expo comes at a time when China’s economy is growing at a slower rate and imports are dropping, worsened by a long-running trade row with Washington.

Xi addressed these tensions creatively in his opening remarks, describing them as the inevitable outcome of a more integrated world. “Distances between countries are getting shorter, and interactions among countries are growing, hence the possibility of differences and frictions,” he explained.

Trade negotiators are said to be trying to finalise a ‘phase one’ agreement for Xi to sign with US President Donald Trump later this month, pressing pause on a tariff dispute that has dampened sentiment across the global economy.

But what about the wider mood on doing business with China? Also launched this week was the latest of the HSBC Navigator report, an annual survey of commercial sentiment across thousands of the bank’s clients.

WiC talked to Stuart Tait, HSBC’s Head of Commercial Banking in Asia-Pacific, for more on what the report was saying about trade with China.

The Navigator study seems quite positive, including most of its comments on trade with China?

Yes, the survey’s tone does sound quite upbeat. People might say this doesn’t match what we are reading in the press but it’s worth remembering that the findings come directly from the companies we surveyed, they’re not just our view.

The mood was similar at this week’s expo in Shanghai, where HSBC welcomed customers from around the world. As a forum for promoting imports it was another major event, just as big as last year’s inaugural expo, with Xi Jinping, the Chinese president, there again to open it.

The expo also highlighted a theme from Navigator: the rise of China’s consumers?

People have been talking about China’s transition into a consumer economy for a while and I think we can all see that this story is well underway. Consumption already accounts for more than half of China’s GDP and if we look at more developed markets for comparisons, there’s still a lot of room for the trend to continue.

For example, GDP per capita in China is currently about a third of the level in the United States so there is plenty of upside for further growth, especially with forecasts that China’s middle-class could reach a billion people by 2025.

We often talk about how increases in income, or wages, are a key factor in fuelling consumer spending. But one thing I thought was interesting is how non-wage income, or investment returns, is starting to play a role. There are other supporting trends, such as consumer demand for higher-quality products. The spread of e-commerce is another factor, especially in helping consumption spread into inland provinces and lower-tier cities, where the growth hasn’t been quite as strong in the past. And of course, it’s not just a matter of demand for goods – spending on services is growing as well.

Have you experienced a similar trend in your role at HSBC?

When I look back at the customers I was meeting in the past they were more likely to be Chinese manufacturers exporting overseas or international companies making orders in China. But the clients I meet now are from a wider range of sectors, including industries like tech and luxury goods.

Business in previous years was largely about trading goods as well, which is another area that has been changing. A growing proportion of HSBC’s clients today are companies in services sectors like advertising.

How about the trade row between Beijing and Washington? Doesn’t that paint a more pessimistic picture?

Of course there’s a lot of debate about what’s happening in the China-US trade relationship. It’s a bit unclear where that is heading, although it sounds like some progress might be being made in the trade talks at the moment.

It’s worth pointing out that China has been removing trade barriers with the rest of the world. Recently the free trade agreement between China and Singapore was upgraded, for example, and Xi Jinping was in India last month for meetings with India’s leader Narendra Modi. We think that’s a good signal for future trading between those two major economies.

So despite the talk about tariffs, you think the globalisation story is still a strong one? With China still playing a major role?

It’s true there are a few conflicting signals, with some firms wanting to trade closer to home. Maybe that’s because they see shorter supply chains as a way of reducing some of their risks. But we also have to recognise the significance of China’s position in the global supply chain, especially some of its major clusters of business activity. These are deeply embedded ecosystems, some of which have been running for 40 years, where buyers and suppliers, and goods and services, are closely situated.

There’s such strength and stickiness in these clusters that we aren’t seeing a rapid movement of supply chains to other places. Some companies may be running ‘what if’ scenarios, but it’s difficult to just lift them up and move them elsewhere.

Another example is workforces. In Shanghai last weekend I was talking to firms in areas like biogenetics and high-end electronics. They were saying that they had to be where the skilled workforces are and that China is producing something like four million new STEM graduates every year. These firms have overseas operations but they want to be operating in China as well.

Sustainability was another theme in the survey. Why?

The report refers to something called a ‘sustainability mismatch’, which is a difference in how some of the firms trading with China look at sustainability, compared to the Chinese companies themselves.

Among the companies responding from China, 30% said that implementing sustainability in their business practices was essential to their long-term viability. That compared to 21% among their global peers, so the ‘mismatch’ refers to this greater focus on longer-term viability in China than among companies elsewhere.

In this context, sustainability is probably less about environmental factors and more about business considerations. It’s important that companies trading with China recognise the trend and try to add value in how they do business there. If they don’t get it right, it will be harder to succeed.

In the past Chinese firms were more likely to be described as short term in their outlook. What has changed?

China’s 13th Five-Year Plan is the most environmentally focused development plan that we have ever seen and companies have been feeling the pressure from government and regulators. They are also feeling it from consumers, who want to see more of a focus on sustainable practices, especially for environmental reasons.

How has HSBC been responding to the same trend?

The study points out that the biggest challenge for companies trying to be more sustainable is access to funding. This is a priority for us and we’ve already committed $100 billion to clients in support of their sustainability initiatives. That’s a global commitment across different industries and business segments.

As one example, we have a supply chain finance programme with Walmart in which their suppliers are eligible for better financing rates if they demonstrate progress in improving sustainability. The idea is that companies then use the savings to put more sustainable practices into their business. It’s part of an initiative from Walmart to remove a billion tonnes of greenhouse gases from their value chain by 2030.

Of course, HSBC is committed to supporting companies of all sizes. We have staff dedicated to sustainability for our smaller customers as well and we make sure that all of the bank’s relationship managers are trained in sustainable finance.

 

 

 

 

To read the full Navigator report, visit https://www.business.hsbc.com/navigator


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