The China Slowdown: Should the region's businesses be worried?
It used to be said in economic circles that when the US sneezes, the rest of the world catches a cold. While there is doubtless still some truth in this – the US remains the world’s largest economy by GDP – it is China, with its two decades of annual double-digit growth, which has been the main driver of global economic growth, certainly since the financial crash of 2008.
North East businesses with an international outlook have found a willing trading partner in China in recent years, at a time when many other international markets have been stagnant.
But things are changing in China. The country’s latest five-year economic plan makes it abundantly clear that the days of rampant growth are a thing of the past, as China’s leaders look to consolidate and focus more on cleaner industries and higher added value markets. There are also concerns about the environment; unchecked growth has brought with it grave pollution issues, including dangerously high levels of smog in places such as Shanghai, Shenzhen and Beijing.
The Chinese economic juggernaut, while perhaps not stopping, is certainly slowing down – with clear implications for businesses exporting to China or with trading links, including companies who have set up joint ventures with Chinese organisations.
CBI president Paul Drechsler addressed a range of high-level Chinese delegates as part of a CBI Chinese New Year dinner celebration earlier this year.
News. Business. The Big Business Interview. Paul Drechsler, National President of the CBI, and former Teesside ICI worker.
He made some pertinent comments in his address, the general theme of which appeared to be: China is changing but still represents a fantastic opportunity for UK businesses.
He said: “Looking forward, China will remain an opportunity for UK exporters. Today, we’re seeing a Chinese economy which is moving to maturity.
“Even if China grew just 5 per cent this year, it would still add more than twice as much to the world economy than when it was growing 10 % in 2006.
“Let’s remember that China is a market of giants. Shanghai – a city of 24 million – has the same population as Australia, while cities most Brits have never heard of – like Guangzhou, Tianjin or Shenzhen – are home to more people than London.
“China’s middle-classes already have a huge appetite and passion for British goods – from Burberry scarves, to cars made by Bentley or Jaguar Land-Rover.
“And China’s recent rebalancing towards services represents an exciting opportunity for a whole range of industries – from insurance to professional services and our world-beating creative industries.”
But just how significant are the North East’s business ties with China?
While certainly nothing like as important a trading partner as the EU, China has risen steadily up the radar for local exporters since the turn of the century, with local businesses recognising that, while it may initially be a tough nut to crack, China can reap huge financial rewards in the long run.
Chris Milne, North East LEP chief economist, said: “The North East has worked hard to build strong trade links with China; 4.5 per cent of England’s exports to China and 1.8 per cent of its imports.
“In total, the North East England imported £570m worth of goods from China last year, while £450m of goods headed the other way as exports.
“The majority of Chinese demand for our goods, around 60 per cent, is for medicinal and pharmaceutical products.”
Milne also suggests that Chinese middle class consumption has the potential to be a major market for consumer goods and vehicles, “opening up more opportunities for North East trade”.
On the issue of China’s economy slowing down, he added: “China is one of a number of key trade partners for our region and while there could be impacts of a slowdown in the growth of the Chinese economy on the North East, these are more likely to be felt indirectly, in the form of reduced investment and demand in other parts of the national and global economy.
“This will in turn limit demand and investment from other regions. The North East is likely to mirror the national picture, though faces less direct exposure.
“Not only do we face less direct exposure than other parts of the country and Europe but our key exports to China, pharmaceuticals, are products where demand is likely to remain strong.”
This bullish sentiment was mirrored by Brian Dakers, international trade manager with the North East Chamber of Commerce.
The NECC is currently working with 55 member companies which are sending physical goods to the Chinese market, including food and drink, pharmaceuticals, transport equipment and other various manufactured good
“China is consistently one of the North East’s top ten export markets,” Dakers said. “In 2015, the sale of goods alone was worth in excess of £450m an increase of 63 per cent on the previous year.
“While the market presents challenges, and is experiencing some turbulence, our export values continue on an upward trajectory.”
13 ways to do business in China
- Be clear about your needs. This applies to any supply, of course, but if you’re working with manufacturers on the other side of the world, leave no room for confusion about what you’re buying, how you want to work and the effect the relationship will have on your extended supply chain.
- Visit China. Yes, you can do a lot of the prep work online, and even agree terms and payments via email. But there’s no substitute for a site visit. It will ensure you know how things work, you can reassure your own customers about conditions of supply – and you’ll build valuable personal relationships. If you can’t visit, a video call using a system like Skype is better than email.
- Check the bona fides. Chinese companies must file for a registration number with their Ministry of Commerce. If there’s no supplier’s registration certificate, the company could be a front for conmen. Check on these and other documentation.
- Finance is key. Even with well-established customers, Chinese companies will typically ask for 30 per cent up front before they start work and the balancing payment on confirmed shipping to your agents.
- Circle of trust. Know your legal position. If you’re having your own designs manufactured, don’t forget to consult lawyers or advisers well versed in the protection of intellectual property. Get advice about non-disclosure agreements, dispute resolution and local contract laws.
- Relationships are key. Chinese business culture is very distinct. For example, they set huge store by not losing face in business deals, and (particularly in smaller businesses) family and the Confucian tradition of respect remain important. Getting close to your suppliers means building personal trust (in part by demonstrating your competence, expertise and work ethic) and increasing everyone’s room for manoeuvre.
- Learn the language. This might seem extreme – but more and more businesses in the West are seeking in-house mandarin speakers to help build better relationships and speed up communications with Chinese suppliers.
- Check the calendar. Chinese “Spring Festival” (New Year) is the country’s biggest national holiday. Lots of factories shut down as workers return home to their families. That means production halts – and even logistics slow to a crawl. In 2016, February 7th to 13th – ushering in the Year of the Monkey – are the dates to look out for. Watch for May Day, the Dragon Boat festival in June and National Day in October as well.
- Logistics. Finding the right supplier and agreeing terms is just one end of the chain. Equally important are the steps you put in place for local quality control (either by visiting the production line or hiring a local agent), packaging, transit to docks and sea or air freight. There are many freight-forwarding businesses that can build a complete solution; smaller or more time-sensitive consignments can be handled by well-known fulfilment and courier businesses.
- Keep an eye on the Dollar. Most trade with Chinese suppliers is still priced and settled in US Dollars – so Dollar movements against both Sterling and the Renminbi (RMB or “yuan”) should be on your radar. China has opened up in currency somewhat in recent years, and some Western customers see a value in doing deals in yuan. But unless you have a treasury function, play safe on currency and ask the experts.
- Red tape. If you’re not getting a third party to handle the paperwork, there are a host of import regulations, tariffs and duties to consider, both local to the UK and EU-wide. The two systems to remember are SAD and CHIEF. SAD is the CDD form, Single Administrative Document – an import declaration to HMRC. These are submitted via Customs Handling of Import and Export Freight system. You’re also going to need commodity codes for whatever you’re importing, and be prepared for VAT and any duty.
- Alibaba can be useful. The world’s biggest IPO? Must be a reliable business, right? Alibaba.com, which allows you to source Chinese suppliers, is a trusted global brand. But not every company listed on there is legitimate, reliable or adheres to regulations. If you find the goods, services or facilities you need online, head back to point one on this list, and proceed carefully.
- ABOVE ALL… Get assistance. If you’re heading to China for the first time, or even looking at changing suppliers, getting specific help from specialists, trade associations or government agencies and embassies is invaluable. Thousands of UK entrepreneurs now have direct experience of working with Chinese suppliers. Ask your contacts for their own tips.