Cross-border trade has struggled in an unprecedented year for the global economy, with lockdowns and quarantines causing disruption worldwide.
China and the economies of Southeast Asia have bucked a little of the trend in trade terms, however, with nations from ASEAN taking top spot from the European Union earlier this year as China’s leading trading partner. The same countries were also the largest group of signatories last month to the Regional Comprehensive Economic Partnership (RCEP) a new trade deal featuring China and 14 other countries that should help to hasten the region’s economic recovery from the pandemic.
Late last month WiC talked to two senior executives in HSBC’s Commercial Banking business in Singapore – ASEAN’s trade and investment hub – for more on how its trading relationship with China is changing. Harish S Venkatesan is Head of International Subsidiary Banking in Singapore, leading a team that supports the subsidiaries of HSBC’s biggest clients with their operations in the city, while Cherie Teng is Head of Corporate Banking, with a client base of large and mid-sized companies headquartered in Singapore. Their two roles touch on some of the leading themes in the new era of Chinese trade with Singapore, as well as some of the reasons why Chinese companies are coming to Singapore in unprecedented numbers.
Cherie, what’s the bigger picture on Singapore’s exports to China?
Singapore’s exports to China last year reached almost $52 billion in value, with the main contributions coming from sectors including electrical equipment and electronics, machinery and plastics.
The Singapore-Chinese trade corridor has deepened over time, underpinned by government-to-government projects in which Singaporean companies have concentrated their activities in places like Suzhou Industrial Park, Tianjin Eco-city and the Chongqing Connectivity Initiative. But it is the upgraded free trade agreement signed between Singapore and China last year that has been giving the relationship much of its recent impetus, and breaking down barriers to trade and investment.
One of the most significant gains has been smoother customs procedures – all shipments of goods need to be cleared within 48 hours and express shipments released within six hours. A major beneficiary is the petro-chemicals industry, with more of its products also qualifying for preferential customs treatment.
For foreign direct investment into China from Singapore in real estate, the trade agreement has also made it easier for companies to undertake joint construction projects in various cities and provinces, with exemptions from the foreign investment ratio rules.
Overall, the bilateral agreement has been a real shot in the arm for business between the two markets. And now we have the signing of the Regional Comprehensive Economic Partnership, a mammoth trade deal that will further boost ties between the two countries, especially with common rules of origin for goods traded within the bloc.
Are you seeing that same optimism among Singaporean exporters to China?
Yes, that was one of the findings in HSBC’s trade survey ‘Navigator: Growing with China’, which was published last month.
The results highlighted how China’s early economic recovery from the Covid-19 pandemic is fuelling optimism about the opportunities there from exporters around the world – three quarters of the companies in the survey said that they expect to grow their exports to China over the next two years. But what also stands out from my perspective is that companies in Singapore are even more optimistic: 84% of respondents are forecasting that they will be doing more business in the Chinese market in the same period.
We also see a surge in business activities among Singapore companies operating inside China. Firms in the supply chain meeting growing consumer demand in China reported strong growth in recent months compared to the other markets they operate in, because China has been the first to bounce back from the pandemic. We see this trend particularly in electronics component manufacturing and the industrial agri-food sector.
Harish, what proportion of your corporate clients in Singapore are firms from China and why have they come to the city?
My team manages relationships with more than 1,400 corporate clients with operations in Singapore but which have their company headquarters elsewhere in the world. About a fifth of our clients are from China but they have also been the fastest-growing group among our customer base. This year we have seen the proportion of clients from China growing strongly again, for example.
There are two main types of company coming to Singapore. One group has more of an organic approach to expansion in the city in which they set up their own investment or trading units that do business as their ASEAN subsidiaries. The other group is made up of purer investment plays: these firms from China are more focused on acquiring companies in Singapore rather than setting up business operations of their own.
What industries do they generally come from?
It’s a pretty wide selection but some of China’s leading tech companies have been prominent, for instance. Many of these names are well known to the market but we also see smaller, lower-profile firms that are choosing to set up in Singapore.
Another area is the food and beverage sector, where some of the larger companies from China are choosing Singapore as a base. And we are seeing a lot of interest in the education industry, where Chinese firms are making investments in schools.
What are the main factors that bring them to Singapore?
They are attracted for the same reasons as other multinational companies, such as Singapore’s stable legal and regulatory landscape.
Of course, Singapore is also very strategically located at a point where major East and West shipping lanes converge and it has become one of Asia’s largest trading centres. The government here is also very active in promoting the city as a hub for the region. There’s a host of incentives on offer, which can be customised to encourage firms to choose Singapore as a launch pad for international expansion.
There’s also the bilingual talent pool, with English and Mandarin widely spoken. That’s a key attribute in providing a bridge between the Chinese headquarters and the rest of the world. The companies see it as a huge positive and Singapore is in the same time zone as China as well, which is another advantage.
So Singapore is becoming an international base for a growing number of Chinese firms?
Our Chinese clients take different approaches to their activities here. Some see the city as a launch pad for the rest of the ASEAN region, some for the rest of Asia, and some even for the rest of the world.
Indeed, that’s a key part of how HSBC helps its Chinese clients to broaden their presence. Perhaps they start out by looking for assistance in getting a foothold in ASEAN with an organic acquisition. We then help them to get more established with our financing options, cash management solutions and trade services. We can also help them launch from Singapore into business in nearby markets, like Thailand, Indonesia and the Philippines, as well as further afield.
Access to our international network is one of the ways that HSBC stands out from its competitors.
How about some of the main industries? Are Chinese firms active in Singapore’s semiconductor sector?
They have been making investments in the semiconductor industry for a while, with a growing focus on the higher-end of the value chain. Singapore is a centre for the production of processor and controller chips and the Singaporean government has worked hard to attract capital into the value-add areas in the supply chain, with the city cementing its reputation as an important memory chip production base, mostly in flash NAND production.
We’ve also witnessed investment in new companies targeting very specific services, like providing power to some of the most sophisticated machinery in the sector.
Chinese companies have similar goals in climbing the value chain and they are engaging in M&A right across the spectrum, but clearly in a direction that is moving towards the higher-end.
So the combination works well for both countries: Chinese firms want to invest in the space and historically Singapore has been a strong player.
Cherie, what about healthcare exports? Is China a key market for Singaporean pharmaceutical firms?
Singapore’s domestic economy has the highest share of healthcare exports of any country in Asia, worth nearly 6% of its GDP, and it has become a major producer in some important areas, such as the manufacturing of more complex products like vaccines.
A recent report from Fitch Solutions highlights how the city is now home to more than 50 pharmaceutical manufacturing facilities, including plants owned by eight of the world’s 10 biggest pharmaceutical firms.
Most of their sales are being made to the US and countries in Europe, with China ranking as the 8th largest destination for exports, substantially below the key markets. Yet this can overlook the fact China has a crucial role in the production of active pharmaceutical ingredients (APIs), the main inputs for many pharmaceutical production processes. Estimates vary but the Chinese are thought to make at least 40% of all the APIs used worldwide, including sales and supply to many Singaporean factories.
Of course, Chinese pharmaceutical firms also want to sell more of their own products in Singapore and across the Southeast Asian region. As part of this we have also seen a trend in which they take over or partner with local clinics or hospitals to get better access to patients and doctors. The idea is that these acquisitions will serve as sales channels for their own brands, although the Chinese manufacturers still have some way to go before they gain the confidence of local consumers.
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