Global Financial Crisis.

The subprime crisis of the big power has led to the global financial crisis. It seems

that such an expression overstates the strength of the big power. But we cannot

ignore the economic globalization which makes economic communities connect with

and affect each other positively or negatively.

In the financial tsunami hitting every corner of the world, what are the status quo and

future trend of international trade? First of all, it is necessary for us to look at the

trade chain: raw materials - finished product processing firms (manufacturers) -

(suppliers - trade companies) - logistics companies - importers - wholesalers -

retailers- end consumers, financial service providers such as banks, and Internet

platforms for international trade led by Alibaba. On the chain, all the elements are

interactional and can transmit to each other. Price transmission is a key element.

Rate of exchange influences trading price. We can begin with importer, one of

initiators of trade. With the global financial tsunami seeming to gradually calm down,

a procurement manager working with a large company that was founded one hundred

years ago talked about their current situation: we are now facing extremely high

pressure in retail and need to reduce retail prices of our products in market. The

manager urges suppliers to cut down price with three simple reasons: 1. Against the

background of current financial crisis, prices of raw materials have decreased; 2.

Significant reduction in prices of energy products such as petroleum means lower

freight and storage cost; and 3.With the decreasing and stable amplitude of the

financial crisis wave, rate of exchange will tend to level off and rise. Then why do

suppliers need to reduce their prices? Because the consumption end of commodities is

facing much lower purchasing power of the country due to the financial crisis. The
information from the consumption end is that the consumer confidence index goes

down and end consumer groups (including corporate and individual procurement)

reduce their costs, expenses and consumption. With such a weak market, merchants

can only use price reduction as their sharp tool to stimulate consumption. Merchants

promote psychologically by enabling consumers to buy the same goods as before with

less money. Wholesalers and retailers in the middle of the chain deliver goods on the

chain from one level to another. During this course, they gain profits and ensure

normal circulation of goods. Their sensitivity to price and inventory leads to

importer's action mentioned above. As for wholesalers facing high retail pressure,

lower purchasing power and weak sales, price is the only and effective solution to

improve sales.

As for consumables, those who are able to provide the market with inexpensive

commodity with proper quality will have a large market share, no matter they are

wholesalers or importers. This is low-price transmission resulting in larger trade

volume. With increasingly stable financial community, trade will tend to be active and

large in size when consumers have suitable savings and their purchasing power and

consumption confidence index rise. Maybe experts and scholars then will conclude

that the crisis has ended and economy begins a recovery journey. When it comes to

the bulk commodity market, economists say that its bull market has ended since

crude oil price peaked. Those people trading at the peak of the bull market have

made a great loss due to substantially lower price. The time for them to recover from

such a loss may be longer than that for the crisis to come to end. Therefore, goods at

low price will be favorites of people in a certain period of time.

Next, we will discuss the price transmission from the perspective of suppliers. With

the global financial tsunami directly leading to significantly shrunken trade volume, it

is truly a thorny problem to retain customers while continuing to make profit and

reducing risks and losses in such an environment. To maintain its normal operation,

supplier may adjust prices of its products or accept orders and deposit foreign

exchange if rates of exchange fluctuate narrowly, waiting for further stabilization and

rebounding of exchange rate. They look like those who are bundled to stocks

purchased at high prices and wait for being unbundled and reducing loss. Prices of

products from suppliers will be influenced by that of raw materials. It can not be

ignored that the crisis directly makes many small-and-middle-sized enterprises (SMEs)

go bankrupt, or stand on the verge of bankruptcy, or reduce their employees. As an

Internet trade platform, Alibaba, which has a close relationship with those SMEs, said

that the next few years will be a winter in its operation. A lot of SMEs get orders,

generally small ones, through Alibaba. Due to the crisis, there are no longer any small

orders from Alibaba for those SMEs. With the economic depression caused by the crisis

ensuing the global inflation and big ups and downs of price, the lack of orders has

directly led to huge loss of SMEs, especially for those who focus on export trade. As a

result, there is a bankruptcy upsurge of SMEs that operate on a high-cost-and-low-

price basis. The bankruptcy and shrinkage of SMEs have directly affected the proceeds

of Alibaba that mainly provides services for SMEs. Considering this point, the financial

crisis also leads to early coming of the winter of Internet Business-to-Business E-

commerce. Internet E-commerce seeks for breakthroughs in a new operational mode

while waiting for its spring.

What about logistics companies between importers and suppliers? Suppliers or

importers have a direct business relationship with those logistics companies.

Significantly shrunken volume of freight causes the over-capacity of those shipping

companies and forwarders. There is even zero trade freight for transporting goods to

the countries near the ocean. In fact, freight is paid by importers. However, for now,

transport cost is significantly lower than ever before. Similar to sea-borne and air-

borne shipment, international express business has witnessed a big drop in delivery of

samples and documents resulted from decrease in trade. It can be seen that most

parts of the influenced trade chain will incur loss. What about banks? It is impractical

to say that the destruction in trade will lead to weaken business of banks. At most,

banks will have less volume of business in loans and export bill purchase. It is

financial derivatives that are affecting banks, seemingly not in the same field as

trade.

Financial crisis is a situation where the capital chain of financial system breaks.

Superficially, there is not enough currency in an economic system. Actually, the

reason is that the circulation of currency is not good. Superficially, companies or

merchants do not have funds or lack funds and cannot get loans from banks. Money

can not flow freely. These have led to the fact that companies go bankrupt, or reduce

their size of production, or even slow down their trade expansion. The shrinkage in

production and manufacturing industry can be seen directly from less orders and

substantially reduced procurement volume of importers. On the side of retailers, they

sell their inventory as soon as possible, sell at discounted prices to recover cash, and

control inventory or even keep zero inventory. As the financial turbulence hit normal

trade circulation, it results in the big fluctuation of exchange rate and depreciation of

currency. As a result, the procurement cost will be higher. Trade is hit severely by
both increase of purchasing cost and decrease of purchasing power. At this time,

merchants need inexpensive goods more than ever before to compensate the loss

caused by the financial shock. If the sales volume of low-price goods soars in one

country or region, trade friction between trading countries will come forth, without

exception during the time of financial crisis. If there are too many imported goods in

a country, this will directly lead to the rise of trade protectionism and more trade

barriers that violate the principle of free and fair trade. In the previous crises,

countries set trade barriers to hold back low-price goods from exporters, with the

purpose to protect its local industries from being hit, to lower unemployment rate,

and to avoid spread of crisis to a larger scope. Such measures based on individualism

will conversely further the depression of global economy. The measures, aimed at

protecting domestic or local companies, are not good for recovery from a crisis. It will

take longer for the economy to recover when it falls to the bottom. In this financial

crisis, headlines of newspaper report that governments have invested a huge amount

of money to rescue the market and central banks have greatly lowered interest rate

consecutively to stimulate economy, drive consumption, avoid long-time economic

depression, abate financial fluctuation and reduce the huge damage brought about by

the crisis. At this very moment, it is both a risk and an opportunity for international

trade. Risk means that companies and banks may go bankrupt at any time while

opportunity means that consumers of the world need more low-price goods. The bull

commodity market of the world has ended. It seems to tell us that people need to

have more inexpensive goods with good quality when facing lack of money.