China Business Outlook Series in association with Standard Chartered - Part 1

Will current US-China trade relations further shift treasurers’ expectations for their China business?

How are CFOs’ concerns and predictions for the Chinese economy playing out?

As US-China trade relations escalate, global markets are bracing for a possible fallout. The general sentiment is that business will slow down and markets will dip as we go into the second half of 2019. In a recent report issued by S&P Global Ratings (22 May)1 however, economists believe that there will be minimal direct effect from the new trade tariffs on the world’s two largest economies. Rather, they predict that there will be varied and multiple indirect macroeconomic effects on other trade-dependent economies such as Europe and Canada.

This is in line with the understated optimism about business in China that treasurers displayed in the face of brewing trade tensions, currency volatility and liquidity concerns, as reflected by a survey undertaken in November 2018. Of the respondents surveyed, 32% expected their China businesses to perform slightly better in 2019 compared to the year before, while 29% expected things to be slightly worse, and 20% of respondents expected business to be similar to 2018. Interviews with over 160 corporate treasurers and senior treasury and finance executives from Asia, Europe and MENA revealed that opportunities related to the Belt and Road Initiative (BRI) and confidence in government fiscal and monetary policies were among the drivers for such optimism.

The factors that China corporates strongly believed would boost their business were easier credit conditions or additional funding channels in China (46%) and monetary policy easing (42%) . In contrast, overseas MNCs felt that the more important factors were greater flexibility in cross-border liquidity management (40%) and monetary policy easing (37%).

Fig 1. Treasurers’ view on their China business outlook in 2019 2

Cornered by the credit crunch in China, treasurers were optimistic that targeted monetary easing would likely improve conditions for doing business. This perspective gave them a measure of confidence when looking ahead to their China business outlook for 2019. “Our company’s China business in 2019 will be slightly better than 2018. The expectation is based on our business and the government policies. From 2017 to 2018, the government has adjusted regulations on small and medium-sized enterprises. I think the policies will be easier for those companies in the future. This will have a positive impact on China’s economy,” said a treasurer of a Chinese energy company.

The data also revealed an interesting pattern in which respondents expecting a stronger RMB tend to be more bullish on their China business.

Fig. 2 Corporates with a view of a “below 7” RMB exchange rate tend to be more positive on China’s economy

Headwinds including the economic slowdown in China and prolonged trade tensions were the main concerns for respondents. “I think our company’s China business in 2019 will be slightly worse than 2018. Our business is mainly focused on the domestic market. We think that market will produce growth in 2019 that is slower than that observed in 2018,” said a treasury executive of an electric appliance manufacturer in China.

As for trade tensions between US and China, the majority of respondents considered it a medium to long-term risk as at end of 2018. In fact, 63% of respondents expected that it would continue for more than three years. This sentiment has proven to be prescient as the trade impasse has escalated in the months after the survey and shows no sign of abating. Indeed, one CFO commented, “I think the US-China trade tension will last for the next 3 to 5 years. I am cautious on this issue. But I don’t think that the United States will always raise the tariffs. They will try different ways to suppress the competition from China.”

Apart from the two obvious macro factors, exchange rate fluctuation surfaced as another key concern given the prevailing trend of RMB devaluation has continued since the second half of 2018. As long as the exchange rate fluctuates, the price of purchasing and acquisition will follow. Most CFOs and treasurers seem prepared for the renminbi’s depreciation against the US dollar, as 65% of respondents expected the RMB exchange rate against the USD to rise above 7 in 2019. “Generally, our price is set in US dollars, but contracts we have signed in China are in renminbi. With the exchange rate changes, some suppliers will tighten the recovery of our receivables. This will also tighten the cash flow of our company,” said a survey respondent from an aero-tech engineering company. However, despite the challenges, some companies are harvesting benefits from the Belt and Road Initiative. “We have projects in East Africa, Middle East, Europe and Southeast Asia. I think the whole company will have better business performance in 2019. With the promoting of the Belt and Road Initiative and the opening-up of the energy area, we have participated in some huge projects in emerging markets. Besides, the current development projects are all of a huge volume,” added one treasurer of a Chinese state-owned conglomerate. .

The survey was conducted by Asset Benchmark Research in November 2018.

To discover more about treasurers’ China business outlook, please click here


1 From S&P Global Ratings report “The U.S.-China Trade War: The Global Economic Fallout”, 22 May 2019.
2 All decimal points of the categories are below 0.5. The percentage of “substantially better than 2018” category, which has the highest decimal points, is rounded up such that the percentages add up to 100%.

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