China: moving up a gear
Given the level of chatter around China’s economic reform it would be easy to feel it was entering the last mile on its journey to become the global economic superpower. But the People’s Republic is in no rush to push itself prematurely into this position. Its chief authorities – the Peoples Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE) – are fully aware that rushing headlong into Western-inspired reform is inadvisable.
This is not to suggest that the country has failed to make phenomenal progress in recent times in the internationalisation of the renminbi (RMB) and in the breaking down of trade barriers that would otherwise restrain its development. China is fully cognisant of the needs of its own people in terms of the development of social reforms which might otherwise be stifled by an unbridled push towards a free economy.
The journey of RMB has been long and arduous, taking in three broad stages of development, notes Amol Gupte, Region Head of Treasury and Trade Solutions, Asia Pacific, Citi. Its arrival as a trade currency has been largely successful (a quarter of all Chinese imports are already denominated in RMB). But its capital convertibility is still at an initial stage and the third phase of becoming a reserve currency is best described as ‘just off the starting blocks’ – joining the IMF’s list of Special Drawing Rights (SDR) will not take effect until October 2016. “Becoming a meaningful reserve currency is some way off,” Gupte believes. “The level of adoption of RMB will be determined by the extent of confidence that the Chinese government is able to create in the ease of using this currency.”
For RMB to gain traction, it must attain the ability to be freely-denominated, it must be easy to transfer in and out of China, and there must be capacity to co-mingle the two unitary expressions of RMB (CNY in China and CNH in Hong Kong). ‘Ease of use’ also means establishing a regulatory environment conducive to commerce and creating a general setting which market participants are comfortable with.
Many commentators such as Gupte also argue that there is a need for China to open up its capital account, creating and developing its offshore financial markets so investors can hold RMB-denominated assets overseas. China’s clearing infrastructure must facilitate easier movement and settlement of RMB across the world too. This, notes Gupte, is where the multi-bank China International Payment System (CIPS) project has a key role to play, enabling banks to offer their worldwide client-base settlement in RMB. The importance of ensuring deep liquidity in RMB both onshore and offshore must also be attended to. Only a handful of countries (eg Hong Kong and Singapore) have so far used the currency swap lines that the Chinese government has opened up to enable market players – tier one banks such as Citi – to indirectly benefit from that liquidity.
Intrinsically linked to the development of China as an economic force is its way of approaching governance, land reforms, income inequality, healthcare, pensions, education, the environment and a host of other internal matters. These will all at some point intersect with and influence the financial flows of the country. China is undergoing a monumental shift in its economic philosophy: an expectation of rapid change is perhaps to ignore these fundamental concerns. “For an economy like China, its sheer size and the fact that it is centrally controlled, means it can only slowly open up,” notes Gupte. “I do not for one minute believe that large volatile swings are in any way beneficial to its progress. But the Chinese model of governance means it is sometimes difficult to predict future changes or how those changes align with the needs of Corporates in China.”
As corporate treasurers recognise that they have a meaningful portion of their balance sheet in RMB, they will need to understand the influence of reform on their supply chain, in terms of their clients and suppliers. At the very least treasurers must understand how to link onshore domestic flows into offshore flows. “Just a couple of years ago money in China was effectively trapped cash,” notes Gupte. “Today, the regulations allow RMB to be moved in and out under certain defined processes.”
Notwithstanding the pace of reform, corporates operating in China should make it a priority to stay ahead of the curve, understanding where they can leverage and optimise. Working with a bank such as Citi, which is on the ground and engaged with local regulators, can provide both a broad and focused view of change as it happens.
India: firing on all cylinders?
India’s delivery of the goods, both figurative and actual, is tied to its will to change. With an economy expected to grow in 2016 at 7%, it is one of the few emerging market countries of meaningful size and potential that has shown any real spark in recent months, notes Gupte. Higher public and private investment continues apace and domestic consumption is rising rapidly as inflation falls (helped by plummeting commodity prices). Its current government has a progressive stance on facilitating growth through legislation. India’s proposed (and somewhat radical) move towards a national Goods and Services Tax (GST) will be a major boost but it has to be passed into law amidst some serious opposition. It is currently levied on the movement or transfer of ownership of goods and services by individual States. The efficiency of a unified approach is predicted to boost GDP by 1-2%.
The country has engaged in recent times in a number of liberalising reforms allowing, for example, the issuance of rupee-denominated bonds in overseas markets (so-called Masala bonds). It has also opened up to foreign direct investments in sectors such as defence, railways, construction and insurance. However, the real test of the success of these measures is whether the money actually flows in and thereafter keeps coming: as these are very recent changes the waiting game has only just started. In India, the future efficacy of planned changes has been supported by a wealth of underlying grass-roots work in the country. Plans for financial inclusion include a scheme to issue a unique identification (or ‘Aadhaar’) number to all citizens (as at December 2015, 940 million had been issued). As the world’s largest ID project it is being used to provide access to various government services and other activities such as bank account opening (more retail banking, small banks and payment bank licences have also been issued) and hence the participation of millions more in the advancement of the economy.
India’s progress in the e-commerce space has seen online market growth of 35%. The authorities have just approved the involvement of the major international players in this sector, some of which (Amazon, for example) are now locally incorporated. The further permission by Indian authorities for single-brand retail firms to join the e-commerce revolution adds to the forward momentum of this economy.
For all this effort, Gupte argues that the major changes that must happen in India to fully establish – and maintain – its credibility are the passing and implementation of the GST Bill and changes to the existing Land Acquisition Act. The latter is intended to send the message to investors that the administrative burden of infrastructure investment in India is being lifted. Such projects are also top of the agenda. Road, rail, sea and airports provide for the free movement of goods, services and people, and will lift the economy. This is why the government is so focused on highways projects and the quadrilateral high-speed railway connecting all economic centres of the country. “These are real game-changers,” he comments. However, he adds that there is constant need to tackle endemic corruption. “In a country with high economic disparity, that’s large and fragmented it is idealistic to think corruption can be removed completely but it must be dealt with as it impedes meaningful growth.”
As in China, corporate treasurers operating in India need to keep ahead of the game, observing the changes and staying in touch with those with access to the authorities. The wise practitioner will also pay close attention to, and learn how to leverage, India’s digital agenda which, says Gupte, is moving “at an incredible pace”. There are two good reasons for this. Firstly, it can deliver benefits on the expense line – there is plenty of scope to optimise: India has for a long time been perceived to be an entirely paper-based market for trade and commerce settlement but today, more than 90% of the value of settlements in India are electronic. Secondly, the shift in consumer behaviour towards the digital economy means different sales models should be investigated, leveraging data analytics to change the game in terms of market share and competitiveness.
Patience is a virtue
There may be a sense that progress is slow in India because the high expectation felt when the Modi government swept to power in 2014 (based on the guiding principle of “minimum government and maximum governance”) is taking longer to materialise. But it is essential to take the longer-term view, Gupte suggests. India has made significant movement in the right direction over the past decade or so and continues to do so. Indeed, viewing China through the same long-view lens reveals a country that has made sweeping changes that could barely have been anticipated a decade ago. Indeed, as he concludes, “we are sometimes consumed by our own expectations, but both countries have made phenomenal progress”. For treasurers, following this evolution, with the guidance of a well-chosen partner, is the route to leveraging such growth.