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The Silk Road Returns

Mark Emmerson, Head of Trade and Supply Chain, HSBC Europe
The recent shifts in global trade patterns are well documented, with European businesses seeing an ongoing, fundamental shift, not only in who we trade with but also how we trade.

With trade between Asia and Latin America set to rise ten-fold in the years ahead and southern capital flows heading ever-higher, we are witnessing the creation of a new Southern Silk Road – and it is set to revolutionise the global economy. Savvy European businesses are already factoring this gravitational shift in world trade into their growth strategies, particularly through the use of Renminbi-denominated trade settlements.

The re-emergence of the Silk Road trade patterns – the first route to coin the phrase dominated Mediterranean trade with China and India for 3000 years up to the Middle Ages – has been described by HSBC’s Chief Economist, Stephen King as ‘the greatest show on earth’ – of more importance than the Eurozone crisis or the US slowdown.

The scale of the change is not to be underestimated. HSBC believes that trade and capital flows between emerging areas of the world could increase tenfold in the next forty years. In the same way that trade between the developed nations exploded in the 1950s and 1960s, we expect the 21st century to see turbocharged trade growth between the emerging nations. China and India are enjoying increases in living standards every decade that took the US between 30 and 50 years to achieve in the 19th and early 20th Centuries. Their performance has been simply remarkable judged by any conventional economic yardstick.

The data highlights just how rapidly this trend is emerging – China is now the largest foreign investor in Brazil, Laos, Myanmar, Iran, Mongolia and Afghanistan and accounts for five of the world’s top ten largest container ports: twenty years ago, not one Chinese port was in the top twenty. In Brazil, currently 42% of trade is with the developed world, and 36 per cent can be broadly categorised as intercontinental South-South (ISS) trade. HSBC expects that proportion to dramatically increase, ultimately outstripping trade with the developed world by a factor of eight over the next 40 years. By 2050, ISS trade might account for well over half of all Brazil’s trade.

Equally, over land logistical routes will expand to bridge previously disparate markets – the proposed railways coast-to-coast across Colombia and from China through to Turkey, along with expansion of port capacity in the Indian Ocean, is only the beginning of this investment.

The Renminbi

The revolution in trade flows will be matched in capital markets. Asian financial centres are growing rapidly and HSBC forecasts that by 2015 over half of Chinese trade with emerging markets (approximately US$2trn) will be settled in RMB. Furthermore, we expect RMB will become a top three international currency if it becomes fully convertible, with Asia and the emerging markets leading RMB trade and investment.

In identifying internationalisation of the RMB as a key priority for the country’s continued economic growth, China is enabling corporations in both China and its major trade partners to use RMB instead of non-local currencies, such as the Euro or US dollar, for settling cross-border trade. Fewer currency changes, and a perceived strength of the RMB as the Chinese economy continues to grow, make the RMB a real option for traders and bankers, with little indication that it will lose its appeal as China continues to consolidate its prime position in global trade.

For businesses day to day, the deregulation of RMB also means companies can hold the proceeds of trade settlements in RMB, achieving both a natural currency hedge for businesses that have existing receivables and payables already in RMB and a diversification of offshore currency holdings.

There is little doubt that the centre of economic and political gravity is heading South and East in a 21st century version of the original Asian Silk Road. The phenomenon, which has been developing rapidly in recent years has seen China develop huge physical infrastructure and the next twenty years are likely to see this continue – with concurrent, massive growth of China’s financial infrastructure.

For European businesses, the focus must be beyond engaging with China as a stand-alone market and recognising the importance of this fundamental change in world trade. The increased investment and trade flows between emerging and developing economies is building connectivity at a remarkable pace, creating new markets and opportunities for well-placed businesses.

The challenge for European corporate leaders is no longer how the world economy will change in the coming decades, but whether they are in the prime position to prosper in this new economic order.

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