Jul 06, 2010 07:32 PM

Revaluation Causes Concern Among Exporters

At the start of this month, the China Foreign Exchange Trading Center quoted the central parity of the yuan to the U.S. dollar as the highest value for the yuan since exchange rate reforms in July 2005 at 6.7720 on July 2. Two weeks after resuming exchange rate reform, the yuan had risen 0.81 percent against the dollar.

"After the financial crisis, the appreciation topic had merely paused for a breath. Now it's been revived," said Zhang Zhenyong, president of Beijing B.J. Electric Motor Co., Ltd. Zhang said that while at the moment it doesn't look like the value of the yuan will change dramatically, he thinks the appreciation trend will continue in the medium and long-term.

On June 19, the People's Bank of China (PBOC), China's central bank, decided to enhance the flexibility of the yuan exchange rate, halting the provisional yuan exchange rate policy that had been instituted since the outbreak of the financial crisis.

In subsequent trading days, the flexibility of the yuan exchange rate increased significantly, with the central parity against the dollar rising as high as 6.7858 and falling as low as 6.8102. In over-the-counter transactions, a single-day appreciation once reached 0.46 percent.

Despite long-running expectations for exchange rate reform and the absorption of the exchange rate impact, Caixin found that export companies on the whole lack effective tools and strategies to cope with exchange rate volatility.

From One-way to Two-way Volatility

China's central bank has been using the dollar-yuan central parity rate to show that it expects the yuan to both rise and fall rather than just rise continuously against the U.S. dollar. The central parity rate is the daily mid-point around which the spot rate is allowed to trade up or down by as much as 0.5%.

"Right now, the two-way exchange rate fluctuations are difficult for small and medium enterprises to grasp," Yang Jun, the general manager of Cocodemer China, a textile trading company, told Caixin, adding that he now has a difficult time deciding how to quote prices.

Yang explained that with the appreciation of the yuan, his business would still be able to predict and could guarantee a quoted price to be valid for a month. But now that the value of the yuan may drop or rise, he is unsure. Right now his only option is to make a quote based on the current exchange rate and then have discussions based on the exchange rate at the time of the money transfer. But some customers have been less flexible than others and demand to pay based on the formerly agreed upon price.

Fortunately, Yang's company trades in high-end products, with gross margins of 20 to 30 percent. The company's customers also have their own brands, so the impact on them is less significant.

"Now that the policy has come out, it will definitely go in the direction of appreciation," Yang said. The company's contracts now clearly state the rate on which the transaction is based. At the same time, the company is controlling the scale of orders. Currently the period from order to settlement is generally controlled at about half a month, or two months at the longest. Now, the company hesitated about large orders that require six months to a year to complete delivery.

"Right now, it isn't rising much and things have been fine. In the future it won't be easy to say," Wan Bingzheng, vice president of Yantai North Home Textile Co., Ltd., told Caixin. Currently the entire textile industry marketplace is unstable, Wan explained. Raw materials, including cloth, cotton yarn and cotton "have a new price each day," he said. If exchange rate fluctuations widen, the situation will be even more serious.

Wan said that new orders are easier to negotiate. Although the company manufactures mid and high-end textile products, working price increases into ongoing orders are not easy.

Even for companies with some bargaining power, exchange rate fluctuations mean unstable times for the exporters. B.J. Electric Motor mainly exports energy efficient motors, which are long-term, complementary products. After the exchange rate reform of 2005, the company found itself working harder as the yuan appreciated. "We had to renegotiate prices basically once a quarter, and our bargaining power eroded over time," said Zhang.

Peng Lei, director of FAW Group Import & Export Corporation's market department, told Caixin that exchange rate fluctuations "basically can't be digested." He says that since the exchange rate reform, the company has already attempted to ride out a 20 percent rise in the exchange rate. The company can only rely on increasing value-added technology or building factories abroad in order to survive.

The companies which usually have a period of three to four months from taking orders to settlement, can adjust production and orders according to changes. In comparison, shipbuilding, equipment and other industries have order cycles of two to three years or longer, making them much more sensitive to changes to the exchange rate.

Because it is unable to gauge the pace of exchange rate movement, Huanghai Shipbuilding Co. has slowed the acceptance of ship orders. The company's senior manager Zhou Anchang explained that while many shipbuilders have picked up new orders, the most recent large orders are by domestic companies settling in yuan. "Nobody is taking foreign orders lightly," Zhou said.

According to statistics from the China Chamber of Commerce for Import and Export of Machinery and Electronic Products, communications equipment, power equipment, railway equipment, petrochemical equipment, metallurgical equipment, building materials and equipment and other equipment industries had US$ 90 billion in new contracts in 2009. Accumulated orders on hand amounted to US$ 150 billion to 200 billion, which will face the risks of exchange rate fluctuations.

Since the 2005 exchange rate reform, export companies have had some knowledge of yuan exchange rate changes. Some companies have used a number of financial instruments to mitigate risks associated with exchange rate fluctuations, but for now, few are satisfied with the results.

On June 22, six government agencies including the central bank and Ministry of Finance jointly announced that the cross-border yuan settlement pilot would be expanded to 20 provinces, autonomous regions and municipalities.

"Sometimes it seems like the policy is good, but there are too many intermediate links. Real implementation will be very difficult," Zhou told Caixin. His company is not currently considering yuan settlement for cross-border trade.

"We're doing research, but we haven't started discussions with customers on a large scale," Peng said, adding that he wasn't optimistic about the prospects for customers accepting yuan settlement. Peng figures that foreign interest in yuan settlement is too low, with only China's ASEAN neighbors possibly being easy to embrace the idea.

Wang Zhengang, president of Midea Group's home appliance unit says that he hopes the government will increase yuan settlement efforts, but doesn't think it will be easy to implement. Wang thinks the problem is that customers don't have enough access to yuan settlements. Without being freely convertible on a global scale, yuan settlement is just a hope, and implementation will be slow.

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