Navigating China’s Transformational Economy

Leaders from China-based companies discuss key trends influencing the nation’s economic development

A significant challenge for foreign companies that are considering China as an investment destination is gaining access to practical, on-the-ground knowledge, which outlines the challenges and opportunities of doing business in the country. It is therefore fitting that executives from China-based firms gave their views on a number of issues relating to the nation’s economy and its currency, the renminbi (RMB), at the APAC Treasurers Forum.

The following topics featured prominently:

China’s economic transition: a hard or soft landing?

The general consensus among speakers is that it that the economy will experience a softer landing than has previously been predicted. This is because both the Chinese government and the private sector are moving the economy towards consumer demand, rather than supporting sectors that have over-capacity, like steel and other commodities-based industries. Structural challenges remain, but these are not surmountable in the long-term. Indeed, while government-driven at present, market reforms and consolidation across a number of stressed industries will likely lead to greater collaboration among municipalities, SOEs and the private sector. This will ensure that these sectors begin to operate more efficiently and profitably.

New industries that are shaping China’s global future

High-value sectors, like IT, cleantech and healthcare, are creating opportunities for domestic and international businesses at home, and for Chinese firms overseas. Furthermore, China is becoming a global leader in many of these sectors, where cities have become industry hubs, like Shenzhen for IT. These new industries are also providing employment opportunities for workers from more conventional businesses. For example, a former steel worker might now work as a driver for Didi, or as a sales representative for an internet-based company.

The business models of Chinese companies differ from those used by Western corporations. In China, these are based on partnerships and ecosystems, which can lead to high levels of innovation and productivity. Another noticeable trait is how quality and customer experience are now foremost product attributes among Chinese businesses.

Concerns over debt levels and rising numbers of NPLs

Debt is at about 250% of GDP, and NPL ratios are believed to be at about 5% ― both statistics are causing angst among Chinese and foreign business executives. What is not always understood, however, is that these figures reflect how long-term projects, which reap returns over several years and in some cases decades, are mostly funded through short-term loans, with tenors of about three years, on average. A more sophisticated capital market ― in terms of pool of liquidity, number of issuers and investors, and the range of financing tools ― will help alleviate the current mismatch between loan repayments and project returns.

RMB internationalization and the impact of the currency joining the IMF’s SDR basket

The RMB’s rise as a trade and investment currency has been noteworthy to date. However, the pace of its internationalization has slowed in the past year, in terms of number of bilateral swap agreements announced, the number of offshore RMB clearing hubs launched, and overall corporate usage. Inclusion in the IMF’s SDR basket, is expected to spur RMB adoption, as nations ― and later corporates ― start to harbor holdings of the currency.

China’s high FX reserves allow for further openness of the nation’s capital account, and will prompt a shift of FX assets to non-government sectors. The RMB exchange rate has become more flexible in the past year, in that it is no longer pegged to the US dollar and now depends on market forces and a basket of currencies.

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