‘Growth’, or ‘risk’… which one?

An interesting ‘outlier’ I mentioned in a recent article was China’s Central Bank’s digital currency (CBDC) a digital version of the Yuan or the ‘eCNY’. It is a legal tender that has the potential to make visible an ‘unbanked’ population in its economy.

I was asked what ‘unbanked’ meant… it’s an observation of cultural behaviour where older generations in some countries tend to hold their cash ‘under the mattress’ rather than banking it. It is easy to empathise with that choice as there are endless examples of individuals embezzling money or institutions collapsing in different countries around the world. The Bank Pembangunan Indonesia (Bapindo) is an example. Eddy Tansil embezzled over $420m in that case and managed to bribe his way out of prison after being convicted, escaping to another country, resulting in people losing their entire life savings and the bank collapsing.

So, question for me is if the ‘eCNY’ can change these behaviours and draw the ‘unbanked’ population out, if so, will other countries follow? It is plausible to see how it could with it being centralised, owned and monitored by a Government and a legal tender, albeit an ‘e-tender’.

It’s one, of a series of technological advancements that could change markets we sell to, either by size, by segment, by channel and/or the type of consumer we are targeting? 

At a consumer level there are other advancements, ‘digital red-packets’ of the traditional ‘Hong Bao’ merging culture with technology. It effected consumerism with changes in demand, the most extreme being billions of delayed spending at Chinese New Year last year with of the effects of C-19.

An interesting example in New Zealand is ‘buy now, pay later’ (‘BNPL’) allowing consumers an opportunity to break up payments instead of a large, single outlay of cash. Experts are forecasting that it could outstrip card payments within the next 3-years but warning there is a risk of ‘overextending’ ourselves.

I am observing a similar payment ‘break-up’ in exports with the exacerbation of congestion causing other challenges.

Congestion isn’t abating, headlines continue, and like everyone I hear about changes to capacity, trade lanes or frequencies. I hear freight rates are increasing, either land, air or sea, congestion charges are being imposed, even abnormal charges for containers being repositioned to ‘transhipment ports’ when destination ports aren’t able to accept arrivals. Posit to that, shipping lines are deploying ‘sweeper vessels’ to collect empties and reposition but those efforts are also being hampered with industrial action or C-19 outbreaks on ports, and likely to continue throughout the year.

In a series of calls with different industries in China an ‘interpretation’ of the payment break-up being used is a ‘buy now, alternate payment options, share a percentage’. It isn’t new to use different finance options such as ‘debt’, ‘recapitalisation’ or even ‘discount invoicing’ when anomalies effect day-to-day business, but this is normally done with a set value and interest rate.

It’s interesting when you unpick the ‘buy now, alternate payment options, share a percentage’ more, especially the ‘how’ and ‘who’.

The ‘how’ is business as usual in the beginning when an organisation (or ‘consignee’) purchases and makes a prepayment to a consignor (or ‘exporter’). It changes when it comes to the balance payment when a selected financer (the ‘who’) makes the balance payment on behalf of the ‘consignee’ and share a predetermined percentage of invoice value based on the date a sale is made after the import date (e.g. if sold within 30-days 7% of invoice value will be ‘shared’, 60-days at 9% and 60-days or more at 12% and so on).

The ‘who’ is interesting as it extends beyond ‘normal’ clearing agents and now includes other organisations offering ‘finance’ not normally associated with industries who see opportunities to make money with C-19, but most interesting was State Owned Enterprises (or ‘SOE’s’).

The ‘risks’ associated with each option are becoming a point of discussion.

Expectations are not so clear, organisations offering finance may require a level of liquidity that isn’t normal to industries, or that SOE’s operate to different metrics to those of private or listed businesses, including the question if being ‘state owned’ means it has the potential to be used as a ‘lever’ to execute on the orders of a Government to sell containers to control consumer prices, CPI, or worse be confiscated if orders are not carried out?

It has me thinking about interconnected risks for New Zealand exports.

It omits ‘cultural’ considerations and how they view these options. In my experience of business in China, Chinese clients always seek ‘scale or growth’ so would not be surprised if it was viewed as an opportunity to ‘scale or grow’ as opposed to its intended purpose of bridging ‘cash flow’ requirements. If so, we are at their behest, and if their decision is a wrong one how may that impact us?

So, are we misconstruing these actions as an increase ‘demand’ and inadvertently putting ourselves at risk?

It’s easy to miss, so while there are ‘opportunities’ with technological advancements, there are also associated ‘risks’… being able to manage these risk complexities while exporting needs experience, and astute decisioning.

Ngā mihi, nā,

Andrew Watene

Ngāi Tūhoe

Food, Agribusiness and Exports Lead at KPMG New Zealand

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