New era for Canada-China bilateral business relations

6 minute read
01 June 2015

The Chinese government is making strides to maintain a stable economic growth while promoting its international influence by reducing import tariffs, relaxing limits on individuals investing overseas, and establishing Renminbi (RMB) offshore clearing banks. For its part, the Canadian government has been endeavouring to improve its long-standing economic cooperation with China by opening the first RMB offshore clearing center on the American Continent in Toronto, and by approving the long awaited Montreal-Beijing direct flight. The cumulative effect of these changes ushered in by both countries is a new era of Canada-China bilateral business relations.

Reduced Import Tariffs

The Ministry of Finance of the State Council of China, announced on May 21, 2015 that China would reduce import tariffs on certain consumer goods, including skin care products, fur garments, suits, shoes, and diapers. On average import tariffs will be decreased by fifty percent. Specifically, tariffs on skincare products will decrease from 5 percent to 2 percent, and those of fur garments from 23 percent to 10 percent. The underlying rationale of this new policy is to bolster domestic Chinese consumption and improve the slowing economic growth. The policy will take effect as of June 1st, 2015.

Over the past decade increasingly more Chinese residents have been traveling abroad, or using proxy shopping agents in order to ensure the safety and quality of their consumer goods, and above all to avoid the previously steep import taxes. Although the full impact of this incoming policy remains unclear, it is beyond doubt that the reduction of import tariffs will benefit mainland Chinese residents who have both a strong purchasing power and a desire for consumer goods, but lack the proximity to nearby cheaper markets like Korea and Japan. Further, a lower import tax will likely attract more foreign wholesalers and global brands to China as a whole.

Reduced Limits on Individual Oversea Investments

With respect to outbound investment, China is also taking steps to relax its limits on individual foreign investment. The Vice President of the People's Bank of China announced in March, 2015 that a study is underway to assess the pros and cons of further loosening capital control. This would drastically increase the effects of the current Qualified Domestic Individual Investor Program established in 2007, which only allows licensed Chinese asset managers to sell a set quota of foreign stocks and bonds in China. The new plan will allow Chinese individuals to buy overseas stocks, bonds, mutual funds, insurance, and real estate directly, instead of choosing from a number of limited government-approved foreign mutual funds.

This new plan will also advance China's goal of attaining official reserve currency status for the RMB by allowing them to meet the requirements of the International Monetary Fund, especially the criteria of having a “freely usable”1 currency. The Chinese government is likely to finalise this new plan in the near future. If successful, it is estimated that up to RMB 41 trillion would be available to invest overseas.2 This represents enormous potential opportunities for Canadian businesses seeking capital.

First RMB Offshore Clearing Center in North America

On March 23, 2015, the Canadian Finance Minister and the Chinese ambassador to Canada inaugurated the first RMB trading hub in the Western hemisphere, known as the ICBK.3 Two RMB clearing teams under the ICBK were established in Toronto and Vancouver respectively. The split of the ICBK centers was designed to maximize the advantage of multiple time-zones and ensure the non-stop RMB clearing services once the transactions in Beijing and Singapore are closed.

The launching of RMB clearing centers in Canada reinforces the business relations between the two countries. More importantly, it enables the direct conversion between the Canadian dollar and the Chinese RMB without using an intermediary currency, usually the U.S. dollar. As such, the cost of transactions between companies from both countries will be reduced and the process will be more transparent. Furthermore, as home to the first RMB clearing center on the American continent, Canada is increasing its appeal to companies located in other western countries engaging in RMB-dominated business operations.

Direct Flight Montreal-Beijing

The long awaited direct flight between Montreal and Beijing has now become official. Although the direct flight between these two cities was suggested by the Québec premier during his trade mission in China last October, it was not until May 28, 2015 that Air Canada and Air China jointly announced the launch of this non-stop flight. Starting from Sept. 29, 2015, the first transpacific direct link from Montreal to China will be operational. The direct flight between Montreal and Beijing means more convenient connections, seamless transfers for customers, and naturally more business opportunities.

To conclude, the vast and dynamic business cooperation between Canada and China will be boosted to a new level with the Chinese tariff reductions and upcoming relaxation of individual investment policies combined with an unprecedented ease of currency exchange and connection conveniences.

1 International Monetary Fund, Special Drawing Rights, online (last visited June 3, 2015)

2 Financial times, China to allow individuals buy overseas financial assets, online (last visited June 3, 2015)

3 Centre for International Governance Innovation, North American 1st RMB clearing bank launched in Canada, online (last visited June 3, 2015)

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