China’s goal of capital account liberalization by 2020 will affect Canada’s exporters in three key ways, according to the author of an Export Development Canada (EDC) report on the subject.
David Cosolo, who works in the Corporate Research Department at EDC, said the removal of barriers to capital flow in the Chinese economy will offer Canadian exporters benefits through currency, banking reforms and larger outflows.
“The liberalization of China’s economy offers significant opportunities for Canadian exporters,” Cosolo said. “If Canada doesn’t pursue them, other countries will, and that will dampen Canada’s competitiveness.”
When it comes to currency, exporters can realize financial and business advantages by using China’s currency, the renminbi (RMB), Cosolo said. He added that those who do use RMB can see potential savings of between three and eight per cent on transaction fees as the opportunities to better engage with Chinese small- and medium-sized enterprises (SMEs) open up.
“You can reach a greater number of customers because many SMEs in China don’t want to deal with the hassle of converting currency,” Cosolo said. “Using RMB allows you to tap into a greater network of suppliers or customers, which enhances your overall competitiveness and potentially deepens your value-chain reach.”
To that end, an innovative RMB hub set up in Toronto in 2015 — the first in the Western hemisphere — was designed to facilitate RMB use in Canada, making transactions between Canadian and Chinese firms and suppliers more efficient. Canadians have been slow to sign on to the hub, however. According to an HSBC study, only seven per cent of Canadian businesses used RMB in 2016, more than twice the three per cent who used it the previous year, but well below the global average of 24 per cent.
When it comes to banking reforms, Cosolo noted that ongoing financial system reforms in China — such as improved regulation, information-sharing and corporate governance — should inspire Canadian exporters, who, until now, have been on the fence, to consider China.
“As the perception of China’s banking system improves, that will create less uncertainty and improve the image of the system, which will allow Canadian companies to feel more secure in deciding to export to China,” he said.
Expected large outflows are the third area of opportunity for Canadian exporters and investors. One method in which this will be facilitated will be through China’s Qualified Domestic Individual Investor Program, which is set to launch in six cities across China, whereby individuals with net assets of at least one million RMB will be allowed to make direct investments of up to half their assets in overseas stocks, bonds and real estate — an option formerly limited only to institutions.
“The removal of capital controls is expected to create a surge in outflows from China,” Cosolo stated, adding that the Chinese population has traditionally saved well and therefore has liquid assets to invest. “This has the potential to reach hundreds of billions of dollars, as Chinese consumers attempt to diversify their holdings and earn higher returns on investments.”
Juwai.com, a real estate portal, estimated that if eligible individuals move just 10 per cent of their assets to real estate, nearly $660 billion dollars could flow out of China once the program is launched.
Canadian companies already doing business in China should be poised to seize the investment opportunities that could result from these outflows, or even explore the potential for mergers and acquisitions, Cosolo said. He added that EDC now has two offices in China, one in Shanghai and another in Beijing, and it recently opened a financing hub in Singapore, allowing it to finance significantly more Canadian businesses working in China.
Establishing a ‘China strategy’
Cosolo feels there is tremendous potential for Canadians as China further liberalizes its economy, but he said that for Canadian SMEs, there are challenges.
“There’s a real impetus for Canadian companies to establish a China strategy — especially those who don’t have one in the broadest sense,” he said. “The potential for large-scale Chinese capital is a game-changer that will influence markets, value chains, investment decisions and more. It will be geographically and sector agnostic; in other words, it won’t only be in oil and gas and it won’t only be in, for example, Vancouver. It’ll be across the board.”