On January 26, 2023, a bank employee counted RMB banknotes next to US dollar banknotes at Kasikornbank in Bangkok, Thailand.
Athit Perawongmetha | Athit Perawongmetha Reuters
BEIJING – Chinese companies seeking to grow their exports face a new challenge: the appreciation of the yuan.
The “offshore” yuan-dollar exchange rate traded in Hong Kong surged to its highest level in 2024 – below 7.1 – on Monday before weakening slightly to around 7.18 as of Wednesday afternoon, Wind Information data showed.
Global stock markets fell sharply as investors reassessed the outlook for the U.S. economy and potential interest rate cuts. High interest rates boost the dollar and related assets.
A stronger dollar also helps keep the yuan weak, allowing Chinese exports to be priced competitively overseas. After steadily weakening in the first half of the year, the offshore RMB exchange rate against the US dollar has begun to strengthen in the past month.
Wang Wenni, president of the Shenzhen Cross-Border E-Commerce Association, said in Chinese on Tuesday that many trading companies, especially smaller ones, “are currently adopting the strategy of ‘would rather not take orders than take loss-making orders’,” according to Translated by CNBC.
She cited the example of one such company that generated 20 million yuan ($2.8 million) in revenue during the first half of this year during the yuan’s depreciation, allowing it to increase employee salaries. But she said the company didn’t win any orders in July because the yuan’s strong currency forced it to raise prices several times.
Ryan Zhao, director of Jiangsu Green Willow Textile Co., an export-focused company, said on Tuesday that recent currency fluctuations will lead to a decrease in accounts receivable profits of about 2% this month.
According to CNBC, he said in Chinese: “We are worried that the long-term appreciation of the renminbi will cause Chinese suppliers to increase prices, thus affecting the export business.” He said that the company’s way of dealing with exchange rate fluctuations is to negotiate a middle exchange rate with customers.
On Wednesday, China reported that export growth in dollar terms in July was lower than expected, while import growth was better than expected, which was surprising.
As China’s economic growth slows, exports have become a bright spot. Many local companies, from automakers to e-commerce companies, have accelerated overseas expansion plans to seize opportunities for faster growth overseas.
This also means that Chinese companies now face greater risks from currency fluctuations. China’s foreign exchange regulator has issued guidance over the past two years on how companies can reduce such risks.
Chris Pereira, president and CEO of consultancy iMpact, said: “In addition to geopolitical reasons, Chinese companies are increasingly focusing on hedging currency risks because they are localizing operations around the world, which makes their operations more complex than before.
“In addition to hedging traditional dollar/yuan fluctuations, Chinese cross-border e-commerce companies are increasingly hedging euros, pounds and yen,” he said on Tuesday. Cross-border e-commerce refers to the sale of products between different countries online shopping platform.
Pereira said many of his clients work with fintech companies such as Airwallex and Lianlian Pay. “Larger Chinese cross-border e-commerce companies often work with banks to obtain forward contracts or options that allow them to lock in exchange rates for future transactions,” he said.
Changing expectations
Global businesses and investors have become more concerned about currency risks in recent days. Many institutional investors started trading on Monday Unwinding the popular yen “carry trade”, the yen had been playing an attractive role in global asset allocations until the Bank of Japan last month raised interest rates to their highest level since 2008.
The yuan has a similar appeal due to China’s low interest rates. But some analysts expect that may change.
Zhou Ji, a macro foreign exchange analyst at Nanhua Futures, said, “A large amount of foreign currencies are waiting to be settled against the yuan.”
Zhou pointed to a lack of willingness to reconcile earlier this year amid widespread expectations that the yuan would weaken against the dollar, a view partly supported by the People’s Bank of China’s recent interest rate cuts.
Fast fashion giant Shein and Pinduoduo Holdings Temu are two of the most well-known examples of Chinese cross-border e-commerce companies. Many small businesses – which may have their own factories in China – have entered the industry selling on TikTok, Amazon.com or the platform it operates on Alibaba.
Chinese policymakers have also encouraged the development of cross-border e-commerce by supporting the construction of special economic zones and overseas warehouses.
Official figures show explosive growth in industry More than 120,000 cross-border e-commerce entities As of June, in China.
According to official CNBC data calculations, this type of online international commerce increased by 10.5% annually in the first half of the year, accounting for nearly 5.8% of total trade. That’s a slight increase from the first quarter’s share of about 5.7%. Import and export details for the first half of the year were not immediately available.
Wang from the Shenzhen Cross-Border E-Commerce Association noted that large Chinese companies tend to negotiate deals with business partners to reduce exchange rate risks.
For many small businesses, their overseas expansion is part of an effort to move capital outside China, reducing their Affected by latest exchange rate changes. The company claims its backers include the Plug and Play Technology Center.
He said these companies, many newly registered in the past year or two, have been focusing on spending RMB in China while earning U.S. dollars through overseas sales.
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