RMB Surges, Traders Unprepared for Peak Settlement

• News
• 2024-06-16

The recent sudden appreciation of the Chinese yuan has caused significant losses for foreign trade businessman Ding Yandong. He told reporters that a $300,000 order resulted in a loss of more than 40,000 yuan compared to last week, which is equivalent to nearly half of the profit. However, in order to pay the upstream suppliers on time, they have no choice but to bear the pressure and settle the exchange promptly.

Since August, the Chinese yuan's exchange rate against the US dollar has shown a clear appreciation trend amidst financial market turmoil, with both offshore and onshore yuan breaking through the 7.12 mark, setting a new high since January of this year. On August 7th, the central parity rate of the Chinese yuan exchange rate in the interbank foreign exchange market was 1 US dollar to 7.1386 yuan.

The sharp fluctuations in exchange rates have always been one of the most troublesome risks for foreign trade practitioners. After experiencing a relatively long period of yuan depreciation, the expectations of foreign trade practitioners have not yet changed, and this round of appreciation undoubtedly caught them off guard.

It is the peak season for shipment and settlement for foreign trade practitioner Meng Zhuo, resulting in even greater losses.

His company is a large-scale garment manufacturing enterprise in the Yangtze River Delta region, mainly exporting autumn and winter clothing. Meng Zhuo told reporters that their products are shipped from late June to August each year, "Considering the transportation and customs declaration time, it is currently the peak season for settlement after shipment, and the exchange rate during this period is the most important of the year."

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Around Meng Zhuo, there is a concentration of a large number of garment industry chains related to down jackets and cotton-padded clothes, which are also in the peak season for shipment and settlement, and inevitably affected by the recent appreciation of the yuan.

In the past, medium and large foreign trade companies would often adopt the practice of fixing exchange rates to cope with the risks of exchange rate fluctuations. However, Meng Zhuo said that in the past few years, the determination to fix exchange rates was strong, but since the second half of last year, the trend of the US dollar strengthening has been obvious, and the proportion of fixed exchange rates has been greatly reduced. This has exacerbated the degree of profit loss brought about by this round of appreciation.

For Ding Yandong, the experience of losing tens of thousands of yuan in a single order due to exchange rate fluctuations is painful. When the yuan depreciated before, he had encountered overseas customers using this as a reason to press for price reductions, but in the face of the sudden appreciation of the yuan, it is impossible to negotiate with customers to share or adjust the price, "It's easy to talk about price reduction, but not about price increase." This has caused their profits to plummet recently.

Foreign trade practitioner Su Wei told reporters that due to the large amount of orders accumulated, they are still waiting for a more suitable settlement opportunity when funds are not very tight. Currently, they have also taken some measures to fix the exchange rate for a portion of the amount.In Meng Zhuo's view, a multitude of foreign trade companies must convert the vast majority of their income into local currency as soon as possible to have funds to pay suppliers, "suppliers are also waiting to pay wages."

Although summer is the off-season for his niche industry, under the pressure of soaring sea freight costs since May, they still have some goods backlog, "a Middle Eastern client placed an urgent order before, and we quickly loaded it for him, but two months have passed, and he hasn't shipped it yet because he thinks the freight is too expensive." As a result, they are also facing pressure from payment terms, and the next period will be a rush to ship goods.

Exchange rate fluctuations remain high in the short term.

Faced with the sudden appreciation trend of the yuan, many people's expectations for the strength of the US dollar have not changed. Next, the traditional foreign trade peak season is about to arrive. In a period when China's exports are relatively strong, some foreign traders still believe that the yuan will fall back into a depreciation channel. Such expectations also mean that the willingness of current foreign traders to actively convert foreign exchange is not strong.

The uncertainty of exchange rates will further intensify. The FICC team of Huatai Futures proposed that although the counter-cyclical factor of policy has provided certain support for the yuan, in the context of a complex global economic environment, exchange rate volatility may increase.

In addition, the US election in November this year, China's exports will also face potential risks of tariff adjustments, which may also bring short-term disturbances to the yuan exchange rate.

Wang Youxin, a senior researcher at the Bank of China Research Institute, believes that in the next few months, the yuan exchange rate will continue to rebound. The complexity of the global political and economic situation and the violent fluctuations in the financial market may prompt more international capital to seek "safe havens" globally. It can be anticipated that yuan-denominated assets will attract more attention.

Faced with the overall downward trend of the global economy and many fluctuation challenges, a large number of Chinese foreign traders are working harder to develop markets and enhance the resilience of the supply chain to cope with current demand changes and maintain profits in fierce competition.

"After all, large orders are few, so if we take more small orders, the profit is also higher, and the overall is considerable." Su Wei said. With the continuous increase in the penetration rate of cross-border e-commerce, overseas buyers are also more cautious in decision-making, and the trend of order fragmentation is still strengthening. For them, changing the previous mindset of focusing on large volume orders and turning to focus on faster turnover small orders is a way to better leverage the advantages of China's supply chain.

Before, Su Wei and his team mainly provided large-scale OEM services for European and American clothing brands. Affected by the economic downturn and the shift of production capacity to Southeast Asia, these brands' export orders in China have contracted significantly. To this end, they are also increasing their investment in Southeast Asia, increasing the proportion of production in Vietnam, and aiming at the "Belt and Road" region to further develop the Southeast Asian market.An increasing number of Chinese foreign traders are also developing differentiated products with the philosophy of "what others don't have, I have," accelerating the renewal of their products to seek growth and increase profits. Du Chuankui, a foreign trader who has both proprietary brands and OEM (Original Equipment Manufacturer) services, is on one hand restoring the normal supply speed of the new factory, and on the other hand, is intensifying the development of new products. In addition to setting up offices and warehouses in some European and American countries, they have also established a company in Cambodia and invested in building a new factory in Thailand in recent years to avoid trade friction risks and enhance the resilience of the supply chain.

Su Wei and her team have also accelerated the pace of walking on both domestic and foreign trade legs. According to her observation, under the trend of international brands readjusting their industrial chains, the product lines targeting the Chinese mainland market are becoming increasingly localized and differentiated, which requires them to respond more quickly to the local market. Through timely adjustments in the supply chain, they have gained more orders targeting the Chinese market in the past two years.

Unlike exports, Chinese importers benefit from the trend of the appreciation of the renminbi. A significant exchange rate increase is expected to promote the growth of China's import business. However, long-term exchange rate stability is ultimately what any foreign trader engaged in global business would most like to see.

The People's Bank of China has repeatedly stated that it will continue to maintain the basic stability of the renminbi exchange rate at a reasonable and balanced level.