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What does China’s currency crisis mean for exporters?

After a dramatic 12 months for China’s economy, should Yorkshire businesses with export aspirations be wary?

Matthew Grandage, China affairs expert with Yorkshire-based export specialist and advisor Chamber International, has a keen understanding of the issues and implications.

IT’S been a rollercoaster year but the Shanghai Composite Index is now roughly back to where it was just over a year ago.

Its rapid rise to June 2015 and equally rapid fall since then almost mirror each other. China’s recent trade figures have been significantly down too, not least because of decreased demand from her export markets – a fair proportion of what China imports as raw materials it then re-exports.

December’s figures were actually better than feared, however, prompting some commentators to suggest that the worst is over. It’s a confusing picture – should British exporters be worried?

As is often noted, China’s stock market has a relatively high proportion of private investors – its importance for the rest of China’s economy is much less than, say, the FTSE’s for Britain. However, China’s stock market tremors do have implications for UK exports in a number of ways, firstly because they’re sending shock waves through markets around the world, and secondly because they are symptomatic of bigger issues and trends within China – particularly a rapidly changing economy, growing middle class and ageing population.

Take manufacturing for example. Much of the overcapacity in China is from low-quality producers; falling national factory output figures hide the more important truth that Chinese manufacturing is experiencing (to quote a recent McKinsey report) “an evolution towards extremes of performance”.

Not too many years ago domestic manufacturers looked pretty similar (except in terms of size), but now the difference is stark: some are going from strength to strength through innovation, skilful management and wise investment (eg Huawei, Yutong, Chint) while others are stagnating and probably doomed. In the latter group are some giant loss-making SOEs – “zombie companies”, as the Chinese have begun to call them.

What does this mean for UK exporters? British businesses tend to compete in China based on quality, brand and specialist knowledge, not just on price, so the shutdowns in, for example, China’s steel industry, are not likely to affect UK exports much – those companies would never have bought British goods anyway. And there are great new opportunities too because strong, lean, innovative Chinese producers are demanding levels of quality, service, safety and efficiency that they would never have considered even 10 years ago. One such opportunity is the need for high-quality specialist tooling – which a number of Yorkshire manufacturers, including Bradford’s Bar Products & Services Ltd have been ready to provide. So it’s crucial to consider – are you dealing with a tiger or a tortoise? (McKinsey again). If your potential customer is a tortoise then you might want to look elsewhere, but if it’s a tiger – hang on in there!

British FMCG producers shouldn’t let themselves be put off by China’s stock market woes either – their market is China’s middle and wealthy classes, and 2015-16’s share price volatility reflects a massive growth in that market (not a threat to its existence). China’s food imports are growing rapidly, driven by chronic local undersupply, rising disposable incomes, and consumers’ concerns about quality and safety. One company “taking the bull by the horns” is Arla Foods, a dairy firm with plants in Leeds, Pontefract and Settle. They have gained product approvals and clinched a 10-year agreement with China’s baby food maker Biostime International, resulting in new investment and the addition of production capacity for infant formula products.

British fashion and clothing producers also have a great market opportunities in China too, provided they protect their distribution and IPR.

Private stock-market speculation has been driven partly by individuals’ need to prepare for old age. The fact that China is ageing so quickly (220 million over-60s today, projected to rise to 480 million by 2050 – a third of the population) is a huge challenge. British expertise in the design and provision of elderly care is in demand as China seeks out viable, quality alternatives to the traditional family-home-care approach on which it currently relies. China is also the world’s third largest market for medicines (£65 billion, 14% annual growth), and has a growing desire for high-quality, foreign-made medical devices – all great opportunities for British business.

York-based DWA Architects Ltd have recognised the opportunity presented by this social change, and are seeing their winning design for a Senior Living Care Village in Shunde, Guangzhou come to life in 2016. The firm, working with Beijing-based partner TLD Design Consulting won an international design competition for the project which is designed to accommodate 750 people, including many with severe and terminal care needs. A further 450 places should be added during the next phase of the project.

Chamber International provided services that facilitated £82 million of exports to China in 2015, and most of its clients are from the Yorkshire region.

Total UK exports of goods and services to China rose to £18.3 billion in 2014, and were £9 billion in the first half of 2015. This represents a 9000% increase since 2000, when the figure for the year was just £2 billion.

Article written by Matthew Grandage, Chamber International’s Associate for China Affairs

This was posted in Bdaily's Members' News section by Sarah Hyde .