The global economic crisis has affected even the Chinese economy, which is currently undergoing a period of retrenchment that should serve to benefit both foreign buyers and exporters.
Although it has experienced huge and rapid expansion in recent years, the rate of growth of the Chinese export market is slowing considerably. Official figures for October showed that exports rose to $128 billion, a 19 per cent increase on the year, but that was down from September’s 22 per cent and the recent peak of 27 per cent in July. Government statistics also show that 67,000 factories closed down in China in the first half of 2008 and more than 100,000 plants are expected to close by the end of the year.
Even China’s boom sectors are suffering: 3,631 toy exporters – about half of the total – shut down in 2008, according to the General Administration of Customs.
Help for exporters
One concern is that a weakening Chinese export market will have a knock-on effect on the domestic market. A reduction in GDP growth has caused the Chinese government to rethink its strategies for capping growth in exports. China recently announced that it would raise export tariff rebates on more than 3,700 items – mainly labour-intensive, mechanical and electrical products and other items vulnerable to weakening overseas demand – and make adjustments on other items, the third such recent move. In October, the Ministry of Finance also announced a hike in export tariff rebates on some toys, textile and mechanical products. Exporters of those products have been given rebates of 5-17 per cent from 1 November.
The downturn is helping Chinese exporters in other ways too. The significant reduction in shipping costs – owing to falls in fuel prices and shipping volumes – has had a positive impact on foreign manufacturing and importing. Equally, lower oil prices have reduced overheads for manufacturers and a more settled foreign exchange rate against the US dollar has allowed them to stabilise their pricing.
The economic crisis is also acting as a catalyst for competition. Chinese manufacturers are under huge pressure not only to retain current customers, but also to attract new ones, so now is a good time to renegotiate prices. It might also be timely to raise the possibility of new payment terms through trade finance initiatives. The stabilisation of the yuan means that manufacturers are more open to accepting extended terms and the price you pay today is much more likely than in the past to be the price you pay in 90 days’ time.
However, as has happened in other major economic powers, China’s banking system has suffered a huge crisis of confidence. The mistrust bred by the recent failures of overseas banks and businesses means the traditional method of payment – a letter of credit – is being rejected. Chinese exporters are increasingly wary of releasing goods at port and suppliers often insist on early payment on orders as a guarantee for completion.
Although domestic banking provision is improving, the evolution is far from complete. Foreign exchange dealings, in particular, remain tightly regulated and a reliance on paper-based transactions can cause delays.
Red tape, but opportunities too
In short, trading with China can still be a bureaucratic nightmare, requiring the involvement of banks, invoice discounters, insurance companies, agents, customs and tax authorities, as well as shipping and logistics companies.
The regulatory environment is complex and it is difficult to enter the market without expert help. Not only are there tight controls on federally managed corporate information, there is also a lack of public information about prospective suppliers and business partners. Without local insight and knowledge, the risk of fraud can be high. The best thing foreign buyers can do to mitigate the risk and ensure stability is to focus on high-quality, high-volume items and to diversify the number and type of suppliers they use.
Despite the barriers, though, with a better understanding of the banking system and complex supply chain landscape, as well as the right local relationships and intelligence in place, the downturn offers foreign buyers new opportunities to take advantage of the Chinese situation.
Karl Alomar (kalomar@chinaexportfinance.com) is CEO of China Export Finance, based in New York
