“China’s trade relations with Bangladesh are deepening”
Bangladesh’s extensive reach in clothing exports has spearheaded its growth, pushing its GDP per capita beyond that of India. Part of this success is due to the Chinese taking a stake in clothing sales, although Bangladesh’s economy is also benefiting from a new wave of Chinese investment in local manufacturing, including a smartphone sector of more and more dynamic. Also underway: a series of major investments in the country’s energy and transport sectors under the auspices of the Belt and Road Initiative (BRI).
Kevin Green, Head of Wholesale Banking for HSBC in Bangladesh, reveals how trade and investment ties are growing between the two markets
Bangladesh is now a major exporter of clothing and has taken market share from China. Should we consider the two countries as competitors in the sector?
Generally speaking, some lower value manufacturing industries have moved from China to low cost countries, and this is also the case in the textile and clothing trade where Bangladesh has been very successful in securing new jobs. , helped by a young and abundant workforce.
Of course, Chinese companies are still active in the supply chain providing raw materials to some Bangladeshi producers. But in part because of the pandemic, more and more manufacturers here are looking to better control their supply chains and produce end-to-end clothing. The role of Chinese imports is likely to diminish as companies integrate more vertically.
How has the Covid-19 situation impacted the Bangladeshi ready-to-wear industry?
It all started with a supply shock when some factories in Bangladesh struggled to source the fabrics and yarns they needed from suppliers in China because production was cut off there.
The situation then turned to a demand shock in Western markets for finished goods, when orders from Europe and North America were delayed or canceled due to how the pandemic was affecting trade in detail.
Fortunately, activity rebounded relatively well in the second half of the year, with clothing producers recouping most of their lost income.
And now? Has the pandemic forced factories in Bangladesh to close?
The situation on the ground is that there was a lockdown but the factories continued to operate. In addition, the government of Bangladesh has extended its fiscal and political support to exporters. There haven’t been any major challenges from a local production perspective, and I haven’t heard that our customers have major problems getting the materials they need from overseas either.
On the demand side, the markets they serve are also opening up quite strongly. This is important because the garment sector accounts for around 80% of Bangladesh’s export earnings.
Have Chinese companies invested in local manufacturing capacity? And is Bangladesh an attractive place to invest in general?
In recent years, we have seen an increase in Chinese FDI inflows to Bangladesh – China was the largest investor in Bangladesh in the years 2018 and 2019. While investment has entered sectors like infrastructure energy and construction, there is also a lot of interest in the textile sector.
The government has also been very motivated to attract foreign capital, creating special zones to facilitate the start-up of foreign investors.
One of the criticisms leveled at Bangladesh in the past is that it has performed poorly in terms of the ease of doing business, but these areas are trying to remove some of these barriers. The strategy started with the creation of export processing zones, but the focus is now on the next phase of economic and industrial zones, which will meet domestic demand, and not just manufacture goods for export.
The government plans to have around 100 such zones in place by 2030 and one of the most important is the China Economic and Industrial Zone (CEIZ) near the port city of Chittagong. It is dedicated to Chinese companies, which should encourage companies to set up there.
Presumably HSBC is working with Chinese companies that are already doing business in the Bangladeshi market?
Yes, we have a dedicated “China Desk” team that supports Chinese companies coming to Bangladesh. In fact, HSBC was the first bank in the country to offer this concept of a “China Desk” manned by Mandarin speaking staff, which greatly reassured Chinese companies arriving in Bangladesh.
We support our clients with our knowledge of local regulations and our understanding of the local market, as well as services such as payments and cash management.
HSBC is Bangladesh’s largest commercial bank, with around 10% of the market supporting imports and exports, and we have introduced innovative structured products in cross-border guarantees, supply chain finance and blockchain which did not previously exist in the local market. .
Our renminbi capacity is also important in helping clients manage transactions between China and Bangladesh.
What are the sectors in which Chinese companies are most active?
One example is the manufacture of cell phones. Nearly 30 million phones were sold here last year, about half of which are made by local producers, who benefit from tax incentives. This has been a factor in which Chinese smartphone makers have chosen to establish their own manufacturing bases in Bangladesh, as the local market is large with relatively low smartphone penetration.
It’s not just the Chinese who come to Bangladesh – companies like Samsung have also set up shop here to sell in the local market.
This touches on a really important dynamic: the large population of Bangladesh and the trend of increasing domestic consumption. The country has a population of around 165 million and the median age is young, just 28 years old. Wealth is growing rapidly, with the economy growing by more than 7% per year in the four years leading up to the pandemic. A report from the Boston Consulting Group recently claimed that the “middle and well-off class” is growing by 10.5% per year. Trends such as urbanization, downsizing of households and an increase in the number of women in the workplace are also driving consumption.
Similar factors are shaping the internet industry, where Bangladesh now has 116 million internet subscribers. Chinese companies have also been active here. We have seen the Chinese giants enter the digital market space in the country through investments and acquisitions.
What about Chinese brands of consumer electronics and housewares? Are they popular?
Chinese brands are widely available and accepted by local consumers. However, they are increasingly faced with competition from products from other countries, as well as a fairly solid local manufacturing base, which benefits from favorable government policies. Large local companies are focused on scaling up their operations and competing with imports from countries like China and India, for example. The size of the domestic market has helped them set up sizeable businesses, so local competition for Chinese imports can be stiff.
What about areas like building new roads and power plants? Is there more dependence on Chinese companies for the latter?
Chinese companies are active in some of the major infrastructure contracts, especially some of the Bangladesh government priority projects in the transportation, power, oil and gas, and telecommunications sectors.
Some of these agreements are funded by the Chinese under government-to-government agreements. For example, China is making a major contribution to the development of Bangladesh’s road, rail and bridge network. One of the main examples is the road and rail bridge over the Padma River, which is being built by a Chinese engineering company.
There are also major investments in power generation and Chinese entrepreneurs are helping Bangladesh develop the electricity distribution network. Another area of future interest is the improvement of the country’s ports, which should boost cross-border trade and the export sector.
Some of these investments fall under the auspices of the Belt and Road Initiative, can you tell us about Bangladesh’s position?
Bangladesh joined the Belt and Road Initiative in 2016 and its government seems very open to Chinese investment. In addition, Bangladesh’s external debt ratios are much lower than those of most other Asian countries, and its foreign exchange reserves are strong. This brings stability, which is part of the attraction for international investors in general.
To sum up: Bangladesh is experiencing major investments in its energy and transport infrastructure; the focus is increasingly on improving manufacturing capabilities in key sectors such as clothing and smartphones; and the economy as a whole is driven by a young, dynamic and hard-working population with growing purchasing power. This is why HSBC is so confident in Bangladesh’s prospects, including its future trade and investment ties with China.
This interview was first publication in ‘Week in China’ and is reposted by special arrangement