As China encounters the slowest GDP growth rate in nearly a quarter century, the question arises whether the nation faces a “new normal” – and one that may have far-reaching implications for the global economy.
However, there is a potential for technology and a focus on cross-border commerce to act as a salve of sorts for slowing growth. MasterCard says in a recent white paper that the “One Belt and One Road” policy – with an eye toward stimulating trade in Europe and other geographies — can help spur growth within China and beyond its borders.
Silk Road 2.0
MasterCard posits that the cross-border initiatives it advocates can be thought of as a “reimagining” of the storied Silk Road trade corridors of centuries past – essentially a trade route that benefited China and all nations with which it traded.
MasterCard says that the focus should nowadays be on small and midsized businesses, which in turn will be the firms that drive innovation in the new age of global trade. As noted in the white paper, 70 percent of China’s cross-border business flows are driven by SMEs.
Key to the 21st century revitalized trade between China and other nations is a three-pillar strategy, according to MasterCard.
The Three Trading Partners Pillars
- Technology For Efficiency| The first pillar is a “fit for purpose” technology platform that can reduce cost and “friction” throughout the cross-border trade process. That will help SMEs maintain access to low cost working capital, and an efficient supply chain. At present, interest rates on working capital financing for SMEs remain as much as two to four times higher than rates charged for larger enterprises.
- Standards For Scale| The development of a “compatible set of standards, frameworks and trade systems,” says MasterCard, will benefit all trading partners rather than undertake the costs and time consumption tied to proprietary systems along the trade route(s). MasterCard offers up the example of the 2014 Apple Pay launch – though it had been rumored that the tech giant had been developing its own soup to nuts payments system, in practice the payments platform was crafted using already-extant standards such as near field communications and tokenization technologies offered up by payments companies such as MasterCard that helped it get to market faster.
- Open Mindset To Lower Costs| Businesses should have an open market mindset, wherein inefficiencies in the global supply chain can be addressed, posits MasterCard. Businesses of all stripes and sizes are facing drags on working capital efficiencies as end to end purchasing and invoicing activities remain sub-optimal. This results in higher costs, says MasterCard.
One key way to address costs is to adopt electronic payments, according to the white paper. Some statistics bear out the inefficiencies tied to traditional financial management. In the United States alone, says MasterCard, 86 percent of costs tied to check processing are tied to activities that span approvals, reconciliations and other steps in the funds transfer. MasterCard itself points to its Basware platform, which focuses on digital payments and invoicing and which can cut the time of the cash flow cycle from 55 days to as little as a single day.
MasterCard also says that efficient working capital management is key to avoid the “grey lending” markets that levy high fees and interest rates on SMEs. There has emerged a new crop of companies that help clients manage working capital, such as Lending Club that facilitate peer to peer lending. In many cases, companies such as Lending Club and Entrepreneurial Finance offer proprietary technologies that take into account non-traditional credit scoring metrics such as personal credit scores to evaluate creditworthiness and calculate appropriate credit terms and interest rates. And in another example, Kabbage uses data from sources as disparate as Square and eBay to utilize client metrics to determine appropriate funding.
Leveling The Playing Field
In reference to open market protocols, MasterCard states that free markets will eventually shape the trade landscape for China and its partners, but the playing field must be level among all players, from state-owned enterprises to small private companies. In fact, state-owned enterprises account for 30 percent of GDP, still high, but quite a bit lower than the 90 percent of GDP seen years ago.
Among several examples, MasterCard says that the revitalized Chinese trade corridor could take an example from the United Kingdom’s “Supply Chain Finance” program that had been launched three years ago. In tandem with larger companies such as British Airways and BAE, large companies worked alongside SMEs to help the supply chain move working capital more efficiently. Through this program, banks are notified by large companies that invoices have been approved (and thus get immediate advances to suppliers) – and as much as £20 billion in cheaper financing is now available to SMEs.
But openness is not a one-way street, says MasterCard. Even as Chinese businesses should be able to push their services and goods across borders, so too should foreign entities do the same into China.
One recommendation from the white paper aimed at the highest echelons of the Chinese government. Officials must be vigilant in “proactively and clearly communicating” efforts to boost foreign perceptions of its commitment to a level playing field for businesses in its domestic markets.