Asia trade: shaping the 21st century

Change in China is having an impact on patterns of trade around the world

In the late 1970s I travelled to Hong Kong’s northern border with the Chinese mainland and looked over to a place called Bao’an County. It was a small village surrounded by paddy fields. There were no signs of it then, but that strip of land was about to change the world – in 1980 it was designated China’s first Special Economic Zone.

Fast forward three decades and Bao’an County is now known as Shenzhen. It has become a thriving city of more than 10 million and a symbol of China’s success. If this sounds like a story about urbanisation, it’s not – it’s a story about trade. The phenomenal rate of change over these past decades in Shenzhen and across China is now having a seismic impact on the patterns of trade around the world.

In 2006, the US was the largest trading partner of 127 countries and China was the largest trading partner of 70 countries. Just five years later, the position switched. China was the largest partner for 127 countries; the US just 76. Asia’s growing trade volumes and shifting trade patterns are going to have a fundamental impact on the global economy over the course of this century.

I believe there will be three tipping points that will be central to the changes we are likely to see in Asia’s trade in the coming years.

The first tipping point is in the orientation of the West. In recent years those nations raising their exposure to China have outperformed. As China and other Asian economies increasingly rebalance away from exporting and towards importing, the scale of this opportunity will only increase. Earlier this month Vice Premier Zhang Gaoli said that in the next five years he expects China to import USD10 trillion of goods and services.

The challenge for economies in the West is clear: they must claim their share of this growth by building connections with the markets that are now driving the global economy. The speed at which they can perform this pivot towards the East will be the decisive factor in their success.

The second tipping point is the rapid expansion of Asia’s middle class, which is a key factor in the increasing demand for imports. Three billion people will join the global middle class by 2050. For many multinationals, Asia’s consumers are already vital.

With the right policy measures, China’s urban household income will at least double by 2022, according to a report by McKinsey. A new, more sophisticated and internationally minded generation of Chinese consumers is set to emerge, shifting the focus of the global marketplace to the East.

Western companies are increasingly targeting this new source of consumer demand and, as they do, they are following the example set by Asian companies over recent years: instead of using the US dollar, they are trading directly in China’s currency, the renminbi.

This is the third tipping point – the rise of the renminbi as a global currency. China’s trade account is now fully open and, increasingly, trade is being settled in renminbi, particularly in Asian markets such as Malaysia and Indonesia. At present there is no direct relationship between the Malaysian ringgit and Indonesian rupiah – conversions are performed through the US dollar. The tipping point will come when those conversions shift from being made in dollars to renminbi.

Each of these tipping points could create opportunity for the West, offering companies the chance to further their international ambitions.