Bangladesh’s extended reach in garments exports has spearheaded its growth story, taking its GDP per capita beyond India’s. Part of that success has come from grabbing share from the Chinese in garment sales, although Bangladesh’s economy is also benefiting from a new wave of Chinese investment in local manufacturing, including an increasingly vibrant smartphone sector. Also underway: a series of major investments in the country’s energy and transport sectors under the auspices of the Belt and Road Initiative (BRI).
WiC spoke to Kevin Green, head of wholesale banking for HSBC in Bangladesh, for more on how trade and investment ties are deepening between the two markets.
Bangladesh is now a major garment exporter and has taken market share from China. Should we see the two countries as competitors in the sector?
In general terms some lower-value manufacturing has been moving out of China to lower-cost countries and that’s also been the case in the textiles and garment trade where Bangladesh has been very successful in winning new work, helped by a young and plentiful workforce.
Of course Chinese firms are still active in the supply chain in providing raw materials to some of the Bangladeshi producers. But partly as a result of the pandemic, more of the manufacturers here are looking to get fuller control of their supply chains and produce garments end-to-end. The role of Chinese imports is probably going to reduce as companies get more vertically integrated.
How has the Covid-19 situation impacted the Bangladeshi ready-made garment industry?
It started out with a supply shock when some factories in Bangladesh struggled to get hold of the fabrics and yarns they needed from suppliers in China because production there had been disrupted.
The situation then moved on to more of a demand shock in Western markets for the finished goods, when orders from Europe and North America were delayed or cancelled because of how the pandemic was affecting the retail trade.
Fortunately, business bounced back relatively well in the second half of the year, with the garment producers recovering most of their lost revenues.
What about now? Has the pandemic forced factories in Bangladesh to close?
The situation on the ground is that there has been a lockdown but the factories have continued to operate. Additionally, the government of Bangladesh has extended fiscal and policy support to exporters. There haven’t been major challenges from a local production standpoint and I am not hearing that our customers are having significant problems sourcing the materials they need from overseas either.
On the demand side, the markets they serve are opening up quite strongly as well. That’s important as the garment sector accounts for about 80% of Bangladesh’s export revenues.
Have Chinese companies invested in local manufacturing capacity? And is Bangladesh an attractive place to invest in general?
In recent years we have seen a step-up in Chinese FDI flowing into Bangladesh – China was the largest investor in Bangladesh in the years 2018 and 2019. While investment has come into sectors like energy infrastructure and construction, there is a lot of interest in the textile sector as well.
The government has also been very motivated in attracting foreign capital, setting up special zones to make it easier for overseas investors to get started.
One of the criticisms of Bangladesh in the past is that it has scored poorly on the ease of doing business but these zones try to take away some of these obstacles. The strategy started out with the creation of export processing zones but the focus is now moving to the next phase of economic and industrial zones, which will meet domestic demand, not just make goods for export.
The government plans to set up a hundred of these zones by 2030 and one of the largest is the Chinese Economic and Industrial Zone (CEIZ) near the port city Chattogram. It is dedicated to Chinese enterprises, which should incentivise companies to set up there.
Presumably HSBC is working with Chinese companies already doing business in the Bangladeshi market?
Yes, we have a dedicated ‘China Desk’ team that supports Chinese businesses coming to Bangladesh. In fact, HSBC was the first bank in the country to come up with this concept of a ‘China Desk’ manned by Mandarin-speaking staff, which gave a lot of comfort to Chinese businesses arriving in Bangladesh.
We help our clients with our knowledge of local regulations and our understanding of the local market, as well as offering services such as payments and cash management.
HSBC is the biggest trade bank in Bangladesh, with about 10% of the market in supporting imports and exports, and we have introduced innovative structured products in cross-border guarantees, supply chain finance and blockchain that didn’t exist previously in the local marketplace.
Our renminbi capability is also important in helping clients manage transactions between China and Bangladesh.
Which are the sectors in which Chinese firms are most active?
Mobile phone manufacturing is one of the examples. Nearly 30 million phones were sold here last year, with about half of the total manufactured by locally based producers, who benefit from tax incentives. This has been a factor in why Chinese smartphone makers are choosing to set up their own manufacturing bases in Bangladesh, because the local market is a big one with relatively low smartphone penetration.
It’s not just the Chinese coming to Bangladesh – companies like Samsung have also set up here as a way of selling into the local market.
This touches on a really important dynamic: Bangladesh’s large population and the trend of increasing domestic consumption. The country has a population of about 165 million people and the median age is young, only 28. Wealth is increasing quickly, with the economy growing more than 7% a year in the four years before the pandemic. A report from the Boston Consulting Group claimed recently that the ‘middle and affluent class’ is growing at 10.5% a year. Trends like urbanisation, smaller households and more women in the workplace are boosting consumption too.
Similar factors are shaping the internet sector, where Bangladesh now has 116 million internet subscribers. Chinese firms have been active here as well. We have seen the Chinese giants moving into the digital market space in the country through investments and acquisitions.
How about Chinese consumer electronics brands and those for household goods? Are they popular?
Chinese brands are widely available and accepted among the local consumers. However, they are increasingly facing competition from goods from other countries, as well as quite a strong local manufacturing base, which benefits from favourable government policies. Large local firms are focused on scaling up their operations and competing with imports from countries like China and India, for instance. The size of the domestic market has helped them to build substantial businesses, so the local competition for Chinese imports can be tough.
What about areas like the construction of new roads and power plants? Is there more reliance on Chinese firms for these?
Chinese companies are active in some of the major infrastructure deals, especially some of the priority projects of the Bangladesh government in the transportation, power, oil and gas, and telecommunications sectors.
Some of these deals are being funded by the Chinese under government-to-government arrangements. For instance China is making a major contribution to developing Bangladesh’s road, rail and bridge network. One of the main examples is the road-and-rail bridge over the Padma River, which is being built by a Chinese engineering firm.
There are also major investments in energy generation and Chinese contractors are helping Bangladesh to build out the power distribution network. Another future area of focus is improving the country’s ports, which should boost cross-border trade and the export sector.
Some of this investment falls under the auspices of the Belt and Road Initiative, can you speak on Bangladesh’s position?
Bangladesh joined the Belt and Road Initiative in 2016 and its government seems very open to Chinese investment. In addition, Bangladesh’s external debt ratios are much lower than most other countries in Asia and its foreign currency reserves are robust. That brings stability, which is part of the attraction for international investors in general.
So to sum up: Bangladesh is seeing major investment in its energy and transport infrastructure; there’s a growing focus on enhancing manufacturing capabilities in key sectors like garments and smartphones; and the wider economy is getting a boost from a young, dynamic and hard-working population, with increasing spending power. All of this is why HSBC is so confident about Bangladesh’s prospects, including its future trade and investment ties with China.
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