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Chasing the dragon

Commentary

By Ellie van Baaren

Four years ago New Zealand proudly became the first western country to sign a free trade agreement with China, but things move fast when it comes to the world’s second largest economy. Have our businesses taken full advantage of what the FTA offered and what other opportunities are out there?

As the world’s largest exporter, second largest importer and the only large economy to average 10 per cent growth every year for the past 30 years, China is a force to be reckoned with on the global stage. Which meant it was a considerable achievement for New Zealand to become the first western country to sign a free trade agreement with the Asian behemoth in 2008.

Four years later and China is our second-largest bilateral trading partner with two-way trade in the year to October 2011 reaching $12.7 billion, and exports from New Zealand increasing by 152 per cent. It’s difficult to tell how much of that growth has come directly from the FTA, but New Zealand China Trade Association chairman Tim White says there is no doubt it has made doing business with China easier for New Zealand companies.

New Zealand Trade and Enterprise recently said New Zealand businesses had saved $50 million in 2011 because of changes that came about through the FTA. However, they also estimated that around $90 million is going begging because as Kiwi exporters fail to make the most of tariff preferences.

“Have we really been able to leverage the FTA? No I don’t think we have,” he says. “I don’t believe we have evolved enough to take full advantage of the FTA. We are too focused on a small group of products. We need to be pulling together and looking at what they want, and what we’re offering.”

White was earlier this year in China at the invitation of the Chinese Government along with 210 delegates from a range of other countries. Part of the visit included a group meeting with the Premier Wen Jibao, who talked further about the areas China was looking to external markets for help in, the largest among them being clean energy and energy conservation, and community healthcare. White says each of these areas provide opportunities for New Zealand businesses.

One of the biggest challenges is scale. White points out that South America had a huge presence on this trip and in general the countries work together on their relationship with China in order to create a bigger market for the Chinese to deal with.

“It’s not just a question of volume, it’s also about available capital to go into such a big market [like China]. Rather than looking at each other as competition, we need to see other businesses as collaborators so we can go into markets together. We need to do business in a way that we get maximum exposure.”

White says this approach is even more important due to the fact that while we were the first to sign an FTA with China, we were by no means the only country working to do so and high-level discussions are being held with a wide range of powerful countries and blocs. “The competitive advantage the FTA gave us is diminishing by the day.”

Another opportunity that New Zealand businesses need to start taking advantage of is the increasing internationalisation of the Renminbi (RMB), or Chinese currency. The People’s Bank of China (PBOC) first started relaxing their currency restrictions through a pilot scheme in 2009. By 2011 all of China’s provinces were eligible to use the currency outside of China.

Gary Cross, Head of Global Trade and Receivables Finance at HSBC New Zealand, says New Zealand businesses need to seriously consider the option of settling some transactions in RMB, especially as more Chinese businesses look to cut out the “middle man” so to speak of currencies such as the Euro and the US dollar.

“There may be some pricing benefit for New Zealand companies,” Cross says. “It may be that the Chinese buyer wants to deal in RMB because that’s what they’re selling the product in. Being able to offer it eliminates an unnecessary expense for both sides.”

The conversations and opportunities around settling in RMB will only increase in the coming years, and if the rest of China’s figures are anything to go by, those increases will be relatively quick – New Zealand businesses cannot afford to be left behind.

HSBC’s economists predict that the RMB is set to replace the pound sterling as the third most popular currency for trade settlement globally, behind the US dollar and euro. An HSBC survey found nearly eight in 10 businesses in Mainland China that haven’t yet started to use RMB to settle cross-border trade are planning to use it in some capacity for future transactions. It also shows that more than US$2 trillion, or half, of China’s total trade with emerging markets is expected to be settled in RMB by 2013-2015.

The Reserve Bank of New Zealand and the PBOC established an RMB25 million (NZ$5 billion) reciprocal currency arrangement in April 2011 in order to support trade settlement in RMB. The swap line lets the RBNZ borrow RMB if financial market disruption makes it difficult for businesses to access RMB to settle transactions with Chinese businesses.

The government has also come on board at the end of last year, when it approved New Zealand Export Credit Office trade guarantees (which provide a guarantee to exporters or banks against defaults on contracts) to be underwritten in RMB.

“There’s the opportunity for companies to have pricing discussions in two different currencies – ‘RMB or US dollar, what do you think works best in this case?’” Cross says. “We’re still going through a learning curve. There’s still a natural instinct for the US dollar, but New Zealand companies are becoming aware of the potential benefits. It’s an evolutionary process.”

HSBC can settle in RMB and in June 2010 helped Fonterra to become the first New Zealand corporate to issue debt denominated in RMB when it sought to raise 300 million Chinese Yuan bonds.

“Both trade with China and the use of RMB are significant and it’s where things are going to be in the very foreseeable future. China will be even more of an economic powerhouse than they are now, so we’re in a good position to take advantage of that.”

By the numbers:

1.34 billion

The population of China as at 2011

70 million

Chinese people travelled abroad in 2011

$5.81 billion

NZ-China trade figures for the 12 months to October 2011

12%

The percentage of Kiwi exports that go to China, making it our second biggest trading partner after Australia.

$1.87 billion

The amount of Chinese investment stock in New Zealand during 2010/2011

$547 million

The amount of New Zealand investment stock in China.

$90 million

The amount New Zealand businesses are leaving on the table in China by not claiming tariff preferences, as estimated by NZTE.

6 hours

The time it takes today for New Zealand to do the same amount of trade with China as it did in the whole year of 1972.


To share your insights on the FTA with our audience in both NZ and China please contact Luke Qin luke.qin@nzcta.co.nz

Pictured: Gary Cross, Head of Global Trade and Receivables Finance HSBC New Zealand