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Getting the Challenges Right
Getting the Challenges Right
13 April 2023

China’s merchandise imports and exports reached a new record high of RMB 42.07 trillion in 2022, maintaining the world’s largest merchandise trade volume for the sixth year. However, the last quarter of 2022 witnessed three consecutive months of decline in China’s export: down 0.3% year-on-year in October, 8.7% in November, and 9.9% in December. Things seem to be getting worse.

The China Shipping Outlook Q4 2022 released by Shanghai International Shipping Institute expects the Chinese shipping industry will continue to weaken in 2023. the China Shipping Confidence Index for Q1 2023 is expected to be 76.49 points, down 5.11 points from Q4 2022, falling into a rather sluggish range. Shipping companies are beginning to lament that there are more empty vessels but less cargo ready to be shipped. As if overnight, China’s export which had been hot for decades, instantly went into a state of acute freeze.

Some macroeconomists explained that this is due to a recession in the global economy and trade. IMF lowered its latest forecast for 2023 global economic growth to 2.7%, down 0.2% from the previous forecast. OECD’s latest report forecasts a global economic slowdown to 2.2% in 2023, down 0.6% from its last forecast; U.S. economic growth in 2022 is 1.5% but slow to 0.5% in 2023, while the eurozone economy grows by 3.1% in 2022 and slow to 0.3% in 2023. The year 2023 will see a broader global slowdown in growth, with about a third of countries experiencing economic contraction.

However, the problem is that exports from Vietnam, India, and neighbouring countries proliferate in the same period. An epic industrial restructuring is behind the decline in Chinese export growth. The Covid Pandemic, Russian-Ukrainian War, and geopolitical tensions are driving a realignment of the global supply chain.

Sony shifted 90% of its camera production capacity from China to its Thailand factory. Its factory in China will only produce items for sale on the Chinese market. Apple is also accelerating its plans to move some of its production outside China. Suppliers are being asked to plan more aggressively to assemble Apple products elsewhere in Asia, particularly in India and Vietnam. Foreign companies and many Chinese companies are implementing their “going abroad” strategy, setting up factories in Vietnam, Mexico, and other emerging countries to address the challenges of global supply chain reshuffling.

2023 will be a critical year for the Chinese market. The biggest positive came from the Chinese government lifting the Zero Covid policy and reopening the country to the world, bringing momentum to China’s economic recovery. However, with the risk of a global recession and geopolitical uncertainty, export growth in the traditional sense is bound to encounter significant headwinds. How do our Chinese members, who have long favoured export factoring, need to meet the challenges in this situation? How do we position ourselves in China market to draw a beautiful Second Curve? Let me highlight a few critical objectives.

Boosting the development of the two-factor model in both cross-border and domestic business.

Despite the headwinds of export growth, China, as a global trade power, is set to be one of the most important markets for international factoring. Among the vast number of small and medium-sized exporters, export factoring still has quite a long tail to fill in the development of the Chinese market. While the import factoring market is also almost uncultivated. Nevertheless, what is even more promising is the potential of the Chinese domestic market. We can lead the way in implementing a two[1]factor model and an open and productive “internet” of factoring involving global banks and non-bank factors, enabling 24/7 access to a broader range of qualified companies in the global supply chain.

Re-establishing the Perception and Confidence in Two-factor Model

Two-factor model is a network linking factors worldwide and a higher-level business model. Through standardized collaboration, members can obtain significant efficiency gains and develop boundless market coverage, thus completely overturning those outdated perceptions of factoring. In China market, we need to build up the mental model of two-factor business widely through systematic planning and promoting so that good conceptions and practices can be deeply rooted in people’s hearts.

Promoting structural transformation in the trade finance sector of commercial banking

Although many banks have acknowledged the trend of traditional trade finance shifting toward factoring and supply chain financing, they have not kept up with the rapid pace of changes in supply chain dynamics nor made the necessary adjustments to their organisational structures and business processes. This has not only resulted in poor customer experiences, but bankers have become increasingly frustrated and overwhelmed by the fragmentation of the workflows. The trade finance and transaction banking sector of commercial banking is at a turning point. Our Chinese banking members are uniquely positioned to create a model for the future of trade finance for global banks.

This article was written by Mr Lin Hui, FCI Regional Director NEA, for the February 2023 edition of the FCI In-Sight Newsletter.

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  • This article was recently published in the FCI In-Sight Newsletter, February 2023 Edition. To read more click here.