When China's economy started showing signs of instability a year or so ago, it looked like the dream was about to end. But over the past 12 months the country's authorities have demonstrated their ability to calm their economy whilst continuing to lay the groundwork for further reform.
In essence, the “calculated caution” of China in handling the acceleration of inward and outward trade flows has served largely to assuage market nervousness, noted Stuart Gulliver, Group Chief Executive, HSBC. The fears of some spectators that its reform programme “was drawing to a premature halt” have yet to materialise. “RMB has largely stabilised, stimulus has moderated the slowdown in Chinese growth and China has pressed forward with its programme of reform.”
As the global environment becomes increasingly sensitive to each direction China takes, Gulliver believes that delivering China's plan safely not only requires calculated caution “but the accommodation and understanding of investors, overseas policy-makers and all those with an interest in China's sustainable development”. But as the country opens up, its financial markets continue to mature and the speed of capital flows accelerate in and out of China. And with RMB now in the IMF's Special Drawing Rights (SDR) basket, it is now officially an international reserve asset.
China's measured steps towards RMB internationalisation, could see half of all Chinese foreign trade settled in RMB by 2020.
Inclusion of RMB in the IMF's SDR basket allows China's currency to take a notable step towards this goal, increasing the willingness of overseas companies to use RMB in trade and driving China's interbank FX market forwards.
Perhaps China's most significant undertaking though is the Belt and Road Initiative (BRI). The aim, to connect China to the rest of Asia and on to Europe, through land and sea routes, is a monumental task requiring huge investment in infrastructure, both in and beyond China. It has been conservatively estimated as requiring cross-border cooperation valued at USD890bn.
BRI is bringing Europe and Asia closer together. So far in 2016, China has signed almost 4000 engineering projects (with a combined value of nearly USD70bn) along this corridor.
“BRI offers clear gains for corporates with expertise to contribute,” said Gulliver.
Indeed, commented Gregory Hodkinson, Chairman of engineering firm, Arup Group, “none of us should underestimate the Belt and Road Initiative”. He compares its likely commercial impact to that of the opening up of America by the First Transcontinental Railroad in the 1860s which revolutionised the economy of the American West.
However, while BRI goes so much further, connecting two thirds of the world's population, it will access only one third of its GDP. For Hodkinson though, BRI is a means of stimulating economic growth where it is needed, across Asia. He sees it as a “fundamentally transformative” development of global significance. As an engineer, he is cognisant of the magnitude of BRI. He recognises that its ambition will outstrip China's national capacity to fund and manage the project and says that in addition to design and engineering skills “there is a need for private finance” to support the work. There are, he noted, huge opportunities for British companies as BRI continues to reach out to the world.
From the largest construction groups to small specialist providers, the UK has a deep pool of experience in delivering international infrastructure projects and financing structures, explained Gulliver. “British financial and professional services firms have a critical role to play in helping countries and investors along the route to realise its potential.”
His Excellency, Liu Xiaoming, Chinese Ambassador to the UK, was in accord, underlining the particular benefits to the UK as BRI links countries to the UK's “talent and resources”, especially around financial and legal services and also in the HR domain where UK learning facilities offer “strong intellectual support” to the development and continuation of global trade.
“Making connections”, is what BRI is all about for Qu Hongbin, Chief Economist, China, HSBC. Trade of around USD1trn already exists between the anticipated 63 countries that BRI will touch but China's continued growth demands more.
If China leads trade relations across the region, as he expects, the use of RMB in cross-border transactions naturally comes into focus. Questions around its suitability as a global currency must now be answered. In part, they have. “SDR recognition gives RMB a boost to market confidence,” noted Vina Cheung, Global Head of RMB Internationalisation, HSBC.
As confidence in RMB rises, so central banks will increase their RMB pools, in turn making financial products easier to access, she believes. This facilitates closer integration of the Chinese operations of overseas businesses with other group entities around the world.
As Chinese authorities ease outflow controls, Cheung believes it will help further consolidate RMB stability, eventually transforming this tentative intercompany settlement currency into a fully functional (and fully convertible) currency.
China's deepening impact on the trade world is largely contingent upon BRI success and the progressive liberalisation of RMB. But reaching out to the world is at odds with the current western trend for anti-globalisation sentiment, noted Hongbin.
With the western world “struggling with globalisation”, Stephen King, HSBC's Senior Economic Adviser, believes that the loss of enthusiasm in the US for the Trans-Pacific Partnership (TPP), could see China fill the ensuing trade 'vacuum' through an extension of the Regional Comprehensive Economic Partnership (RCEP) agreement. This, he suggested, would place Asia-Pacific “increasingly under a Chinese, not a US, sphere of economic influence”. There is, he noted, an already observable “shift of the centre of gravity slowly eastwards”.
As China grows in economic stature, King believes it will cease to be defined by its landmark joining of predominantly western-led trade organisations. Instead it will be seen “by how it chooses to shape its own part of the world”, leading international institutions to which western powers will need to sign up in order to maintain trade links with the new global trade epicentre.
China has leapt from representing just 3 per cent of global world trade in 2000, to 15 per cent - and the biggest single share - now. It has travelled far, from “world factory” to “world market”, noted Hongbin. Its next role beckons and opportunity awaits those who are ready to take it.
The size of China's economy and its shift towards a market economy and increased consumption - driven by the demands of increasingly affluent consumers - has seen its needs diversify from basic resources to include services, technology, luxury goods and foodstuffs, noted Gulliver. “It will be the companies and countries that position themselves to channel China's progress that will be the greatest beneficiaries.”