China experienced its worst economic growth in 13 years in 2012. But an uptick late in the year bodes well for corporates who trade with China.
China’s National Bureau of Statistics said Friday that gross domestic product expanded 7.8 percent for the year and 7.9 percent in the last three months, ahead of expectations (7.7 percent for 2012 and 7.8 percent for the fourth quarter). China’s growth in 2012—the lowest since 1999, when it was 7.6 percent—is largely attributed to the slow recovery in the U.S. and the ongoing debt crisis in Europe. However, many economists believe that the fourth quarter numbers—China’s first increase in the past two years—are an indicator of overall economic strengthening. They are therefore projecting slow but steady growth for 2013 in China and worldwide.
Jason Schenker, president and chief economist at Prestige Economics, told AFP that he expects to see a moderate acceleration of growth in 2013. “I’m not too surprised by the data,” he said. “I think we are going to see an uptick in growth this year, from China and everywhere else. It’s going to be somewhat modest, but positive.”
Schenker believes that corporates who regularly trade with China should feel positive about 2013, but should keep their expectations in check. “I think that modest optimism is appropriate. People need to keep their expectations somewhat tempered, and understand the fact that Chinese growth last year was not great. This year is going to be better, but not fabulous. But it is going to be positive, and their economy is moving in the right direction,” he said.The RMB question
In 2012, the Chinese government allowed all companies in China to make and receive cross-border payments in renminbi, which could provide major savings
for Western corporates, as well as convenience for Chinese suppliers. Trading in renminbi eliminates the need for Chinese companies to go through an FX cancellation procedure and receive permission from China’s State Administration of Foreign Exchange to convert other currencies.
Alfred Nader, vice president, corporate strategy and development at Western Union Business Solutions, told AFP that Chinese small and medium-sized enterprises (SMEs) will especially benefit from billing in the RMB. “SMEs in China have to take on a lot of risk when billing in the USD,” he said. “They’re paying for raw materials today, but are only getting paid by their clients months down the road. By the time they get paid, movements in the USD/RMB have all but depleted their profit margin. Billing in the RMB will benefit all parties involved. The Americans will save several percentage points off of their total bill and the Chinese won’t have to lose margin due to exchange rate fluctuations.”
Nader believes there is “no doubt” that the Chinese government will eventually fully internationalize the RMB and make it fully convertible. “This won’t be done to stimulate the economy, but to further encourage the use of its currency in government, business and personal transactions. It’s the natural progression for the RMB and needed for it to be used as a reserve currency,” he said.
But there is a major risk surrounding the RMB, noted Schenker. Should the currency be allowed to float, it might strengthen significantly. “That could hurt exports quite rapidly,” he said. “The logic behind keeping it pegged and only gradually letting it float is that the leadership in China does not want to create a situation where you have very rapid, negative economic change that could result in significant social unrest. I think that is a very genuine risk if you just let it float.”
Added Schenker: “If it gets stronger, Chinese goods get more expensive. If goods get more expensive, fewer people will buy them. If fewer people buy them, suddenly manufacturing leaves China and goes to the U.S. and elsewhere, and now China’s in a tough spot.”
Nader agreed with Schenker’s assessment, but noted that corporates don’t always buy from China simply because of price difference. “The Chinese will always find a way to remain competitive,” he said. “They’ve made amazing strides in robotics and automation. China isn’t a one trick pony; they have a lot more to offer than just cheap labor."