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ANZ

Crossing borders: transacting in Asia’s new reality

Mark Evans, Managing Director, Transaction Banking, ANZ

Geopolitical issues have dominated the headlines in recent months, but Asia Pacific has proved resilient to these shocks. Corporations doing cross-border business in the region now need to focus on their short-term tactics and long-term strategies to fit Asia Pacific’s new reality. In this article, Mark Evans, Managing Director, Transaction Banking at ANZ explains how corporates can navigate shifting demand patterns and how China’s policy goals and economic profile are shaping the region.

Mark Evans

Managing Director, Transaction Banking

The geopolitical shocks of last year – namely Brexit and the election of Donald Trump – dominated global headlines, with businesses understandably concerned about how the new reality of resurgent economic nationalism might affect cross-border trade and capital flows. Despite the heightened volatility and uncertainty, we do not think these events should be a cause for overreaction. Rather, companies should focus on obtaining a more nuanced understanding of Asia Pacific’s own new reality, characterised by evolving demand patterns and the changing role of China.

The corporate community tends to agree. They tell us that long-term shifts in demand are more significant than short-term volatility, despite the practical challenges the latter may present in the short term. We also find that businesses seeking to make the most of opportunities in this new reality are realigning their thinking to match China’s policy goals and changing economic profile.

Shifting demand patterns

Much attention has been paid to the potential impact on this part of the world of Donald Trump’s trade policies, but we believe that Asia is well placed to withstand the resurgent politics of anti-globalisation. Others agree: the Asian Development Bank recently forecast that Asia-Pacific economies (excluding Japan) would account for 60% of worldwide economic growth this year between them, even with a moderate slowdown expected in China. The prosperity of businesses relies on the extent they can tap into this economic dynamism.

Australia, for instance, is already seeing the impact of shifting demand patterns from Asian economies in this new reality. While resources exports have been subject to some volatility in recent years – and there is little doubt the China-led supercycle is over – other sources of demand from increasingly wealthy Asian populations is catching up, supported in recent months by a softer AUD.

Businesses hoping to tap into these shifting sources of demand need a more nuanced understanding of China’s long-term development and the rationale behind its policies and decision-making.

Growth in services exports, in particular tourism, education and financial services, is rapidly compensating for weaker shipments of resources. Recent data shows the value of tourism-related services alone has almost caught up with iron ore. The constraints here are almost exclusively on the supply side, in the form of the number of flights it is possible to run from key markets, China especially. The positive knock-on effects from expanding supply by adding more flights, such as more hotels, tourism jobs and service infrastructure, are considerable and nowhere near reaching their potential.

And, of course, foreign brands still enjoy some crucial advantages within China, especially when it comes to tapping China’s growing middle class’ demand for quality, trustworthy products. Consumer trust in suppliers is in short supply in China, particularly in the food supply chain, leading to the ever-increasing popularity of daigou sales, where orders are placed online in China for sales agents to pick up produce in physical stores overseas with receipts often required as proof of purchase in the specified location. Reinforcing the message of trust with discerning Chinese consumers is therefore becoming increasingly important.

Understanding a changing China

This means, of course, that businesses hoping to tap into these shifting sources of demand need a more nuanced understanding of China’s long-term development and the rationale behind its policies and decision-making. To say the least, this is not necessarily easy for those outside the country or those doing business across its borders, but it is increasingly important to consider in both long-term strategic planning and short-term tactics.

Taking account of China’s “multiple personalities” is a useful way of understanding the tension between broad policy aims and the sometimes-opaque evolution of rules and regulations for companies transacting with the country.

China embodies the contradictions between a laissez-faire economy and a centrally planned one.

Look at the country’s Five-Year Plans (FYP). They contain detailed blueprints of economic development with measurable targets that cascade from the national to the provincial to the local level—for instance in the 13th FYP to roll out 30,000km of new high-speed rail covering 80% of major cities by 2020. They also reveal the commitment to develop strategic new industries, with the goal of making them account for 15% of GDP. So, while on one level they confirm that China’s demand for resources is far from over, on another they highlight those strategic sectors that are likely to take over from the old, investment-based economy, and which might well become as important to businesses in the future.

At the same time the FYPs also reveals the tensions between long-term strategy and short-term policy. Take the government’s hope for more international business to be conducted in renminbi – reiterated in its commitment in the 13th FYP to continue with the internationalisation of the currency. This necessitates exposing China’s financial system more fully to global market forces, something that is sometimes hard to square with the government’s overriding commitment to promoting stability.

Awkward positions

Shifts between the two priorities can put foreign companies doing business in China in an awkward position. After taking several steps to liberalise the flow of capital across its borders in recent years, and to allow the market to play a greater role in the fixing of the value of the renminbi, volatility in the value of the currency (down 6.6% against the USD through 2016) and the level of its foreign exchange reserves (which fell by nearly US$320bn in the same period) made Beijing think more carefully about this process.

RMB’s share as an international payments currency

Customer initiated and institutional payments. Messages exchanged on SWIFT. Based on value.

RMB’s share as an international payments currency

Source: SWIFTWatch

Last November, the authorities took steps to impose certain exchange controls (via its “window guidance”), some of which hit foreign companies’ abilities to remit dividend payments. It looks like these controls have recently been relaxed – but pinning down what is and is not allowed is far from straightforward.

Perhaps unsurprisingly, such measures mean international usage of the RMB has diminished in recent months. But such short-term fluctuations do not change the long-term calculus, or negate the goals set out in the 13th FYP. On the capital account, the plan makes clear that the bid to make the RMB an international investment currency will continue. On the current account, pressure to transact more in renminbi across borders will grow, as Chinese exporters and importers seek to reduce the risks of dealing with a third currency – typically USD – in their international contracts.

Ultimately the greater use of the RMB across borders will work to the advantage of businesses transacting with the country, too, since they will be able to deal more often with direct currency cross rates (and pricing) without worrying about the RMB’s value to third-party currencies. In the end, of course, full internationalisation will require allowing the renminbi’s value to float, something that seems unlikely in the short term but necessary in the long term – and so important to plan for.

China’s multiple personalities

One useful paradigm for interpreting China was explored by Jason Yat-sen Li, CEO of Yatsen Associates and long-time China expert at a recent ANZ client event. He stated that China should be thought of as a country with multiple, sometimes contradictory personalities, rather than as a monolithic entity.

For instance though, the rule of the Chinese Communist Party is strictly linked to the country’s geographic boundaries, China’s personality as a self-sufficient civilisation stretches across national borders into diaspora populations. Another of China’s personality conflicts, Li explained, arises from whether it is a communist or capitalist country: arguably it is the most successful ever of the former and is now one of the most important of the latter, all the while balancing the tensions inherent between political control and market freedom.

This tension is seen in its position as a hotbed of internet innovation while it simultaneously employs the most restrictive internet controls of any country. In commercial terms there is extraordinary freedom, as the successes of Baidu, Alibaba and Tencent have demonstrated.

The country is at least three years ahead of Australia in terms of mobile payments, Li estimated, with full integration of online-to-offline mobile payments for at least the past two years. Meanwhile the most popular messaging app, WeChat (with over 880m monthly users and counting) has full banking integration to facilitate payments and transfers.

China can hardly therefore be described as a copycat economy. In fact it is incumbent on businesses elsewhere to try to harness some of its innovative spirit. To take just one example, the breadth of the online payments ecosystem in China has given rise to many more novel ways to monetise online audiences than just advertising. These include, for instance, the proliferation of live streaming services like Kuaishou, YY and around 100 others, for which collectively revenues are now around US$3bn (compared to annual box office receipts in China in 2016 of around US$7bn).

Finally, China embodies the contradictions between a laissez-faire economy and a centrally planned one. The kind of anything-goes innovation that characterises Alibaba’s meteoric rise (and crossing of sectoral boundaries) belies the staid progress of reforming China’s state-owned enterprises, not to mention the existence of rolling five-year economic plans.

Long-term strategy, short-term tactics

One core theme running through all of this is the tension between the need to react tactically to short-term volatility and to devise strategy to capitalise on long-term shifts. In that respect, the tensions in Chinese policymaking appear explicable, while the opportunities from changing demand fundamentals, and structural economic shifts, remain clear.

Too much attention has been paid to political events in recent months, removing the focus from fundamental shifts in Asia Pacific economic relationships that continue to progress, and which businesses can capitalise on. All companies that seek to do cross-border business in the Asia Pacific’s new reality will need to adjust both their short-term tactics and their long-term strategy accordingly.

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