By Tongyu Zhang
After downward pressure in foreign trade at the beginning of 2016, China has managed to recover with an upswing in the third quarter of the year, according to the latest Report on Chinese Foreign Trade by the Ministry of Commerce (MOFCOM). By September, China’s foreign trade for the year totaled RMB 17.53 trillion, a decrease of 1.9 percent year-on-year. Exports decreased by 1.6 percent to RMB 10.06 trillion, and imports decreased by 2.3 percent to RMB 7.47 trillion, while the trade surplus expanded by 0.6 percent to RMB 2.6 trillion. Declines in import and export activity narrowed quarter-on-quarter. Due to the weak exchange rate performance of the RMB against the US dollar, the decline in Chinese foreign trade (about 7.8 percent) was intensified when represented in US dollars.
The latest Report on Chinese Foreign Trade, as summarized below, highlights the changing nature of China’s economy, and offers insights into emerging growth areas benefiting from government support.
Trends in China’s foreign trade during the first three quarters of 2016
In the first three quarters of 2016, growth in general trade exceeded that of foreign trade. General trade made up 56 percent of the total, with a value of RMB 9.82 trillion. According to the official report, this suggests that Chinese companies are developing capacity for expanding into international markets. Meanwhile, the multi-year trend of weakening performance in processing trade continued, with a seven percent drop. While state-owned enterprises (SOEs) and foreign-invested enterprises (FIEs) experienced decreases in foreign trade, private enterprises have maintained growth since the beginning of the year. The new business models that have achieved robust growth in 2016 include cross-border e-commerce, market purchasing trade, and comprehensive foreign trade service enterprises.
Electro-mechanical products and traditional labor-intensive products remain China’s major exports, though they declined by 1.8 percent and 0.6 percent, respectively. The official report repeatedly points out a structural upgrading trend in Chinese foreign trade, emphasizing the increasing exports of several high-tech products, such as medical equipment and instruments, storage batteries and solar batteries, materials technology, and aerospace products. Exports of textiles, toys, and plastic products also grew, due to enduring competitive advantages and seasonal factors.
A diverging trend can be detected among the traditional trade partners of China. In the same period, China’s bilateral trade with the EU and Japan rose by 2.7 percent and 2.9 percent, respectively; while, bilateral trade with the US and ASEAN declined by 3.3 percent and 0.8 percent, respectively. Altogether, these economies account for 48.7 percent of China’s total foreign trade. Exports to several countries along the ‘Belt and Road’ maintained strong growth. China’s exports to Pakistan, Russia, Poland, Bangladesh, and India increased by 14.9 percent, 14.1 percent, 11.7 percent, 9.6 percent and 7.8 percent, respectively.
RELATED: Pre-Investment and Entry Strategy Advisory from Dezan Shira & Associates
Opportunities in the structural adjustment of China’s trade
The restructuring of China’s traditional processing trade sector is inevitable. Under a five-year decline, processing trade exports now only take up 33 percent of China’s total exports. In the context of the global economic recession and enduring economic fragility, manufacturing industries in China are confronted with pressure to relocate; either returning to developed countries for greater efficiency or moving to emerging economies for lower costs. Chinese officials describe the situation as “inevitable”, and that it follows the government’s reforms to restructure and optimize Chinese foreign trade. According to a guideline published by the State Council, several measures have been taken to promote processing trade, including market expansion, industrial upgrading, and structural optimization, as well as the relocation of manufacturing to China’s central and western regions. Additionally, many foreign companies are modifying their strategies in China; for example, by locating high-tech production in coastal China for advanced industrial support capacity and relocating manufacturing to central and western regions for cost control.
The importance of foreign service trade is developing rapidly. By August 2016, Chinese foreign service trade totaled US$518.9 billion, with a remarkable 13.5 percent growth. The trade deficit of foreign service trade reached US$163.4 billion, exceeding the total amount of US$136.6 billion in 2015 and indicating that China is still a large market for services import. Travel, overseas study, transportation services, payments for intellectual property, and insurance and pension services contribute most to the trade deficit. Meanwhile, services of processing, professional management and consulting, and telecom, computer, and information technology services recorded a trade surplus in 2016. In addition, several new regions are being established as national pilot zones for service trade development. For example, Chongqing’s Liang Jiang New Area has been established as a key pilot zone for financial, international logistical, exhibitions and tourism services in mid-western China. To take advantage of the fast-growing market for services, foreign companies should make more efforts in promoting their own service-oriented products for both the business-to-consumer (B2C) and business-to-business (B2B) sectors.
Facing a complex international environment, the latest Report on Chinese Foreign Trade held positive, but cautious expectations about Chinese foreign trade in the fourth quarter and into 2017. In addition to providing up-to-date trade statistics, such reports can help foreign investors identify the policy directions of the Chinese government. China’s foreign trade is gradually transforming in line with the country’s broader economic transition towards higher value-added manufacturing and services, which can benefit both domestic and foreign companies, given that they approach China’s changing dynamics strategically. Several foreign trade sectors have been emphasized by the report, including emerging business models of foreign trade, such as cross-border e-commerce, processing trade upgrading, and foreign service trade. Therefore, more attention should be given to those sectors in order to seize the investment opportunities presented by their swift growth. Further, foreign companies that have already started businesses in China may consider intra-country relocation strategies and the division of production chains with a comprehensive consideration of regional, industrial, and financial factors.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.
A Guide to China’s Free Trade Zones
In this issue of China Briefing magazine, we examine China’s four Free Trade Zones and discuss the differences and strongpoints that exist in each of them. We begin by providing an introduction to the FTZs, and then take an in-depth look at the market access conditions, registration procedures and tax environments of each. Finally, we highlight some of the key considerations that foreign companies should be aware of when choosing an FTZ to invest in.
Importing and Exporting in China: a Guide for Trading Companies
In this issue of China Briefing, we discuss the latest import and export trends in China, and analyze the ways in which a foreign company in China can properly prepare for the import/export process. With import taxes and duties adding a significant cost burden, we explain how this system works in China, and highlight some of the tax incentives that the Chinese government has put in place to help stimulate trade.
Using China’s Free Trade & Double Tax Agreements
In this issue of China Briefing, we examine the role of Free Trade Agreements and the various regional blocs that China is either a member of or considering becoming so, as well as how these can be of significance to your China business. We also examine the role of Double Tax Treaties, provide a list of active agreements, and explain how to obtain the tax minimization benefits on offer.