As China’s yuan gets stronger while Ukraine crisis drives up raw material prices, exporters shy away from US dollar
- Some Chinese manufacturers fear losses could mount if the yuan further appreciates to 6.25 against the US dollar, as it would make their exports less competitive
- A stable yuan is an important prerequisite for Beijing to grow exports, which remain integral to China’s economic growth
As the escalating Ukraine crisis further drives up prices of raw materials, China’s exporters are also bracing for their bottom lines to be hit on a second front – a strengthening yuan against the US dollar.
“We can’t understand why the yuan is still appreciating so much in anticipation of the dollar rising as the US Federal Reserve will hike interest rates,” said Jason Ding, who ships car parts mainly to East Africa from Guangdong province.
“We were thinking of holding the US dollar and waiting for the exchange rate to float, but now we have to convert most of it back to yuan.”
Soaring raw material costs have already inflated the prices of Ding’s products, but he is unwilling to lift prices any further, out of fear of losing out to competitors.
“The competition is fierce here,” Ding said. “We only increased ex-factory prices of the products about 5 per cent while raw material prices have been soaring.”
To manage foreign exchange risk, many Chinese exporters such as Ding have the choice of converting their foreign exchange revenue back to the yuan or holding onto the US dollar.
If there is a strong expectation that the yuan could depreciate against the US dollar, exporters will hold the American currency.
If the yuan continues to strengthen against the US dollar, it will also make some of China’s exports less competitive, adding pressure to the cost of production on exporters such as Ding.
The yuan has been gaining against the US dollar since early last year – from around 6.56 in April 2021 to 6.315 today – which means it takes fewer yuan to purchase one US dollar.
Zheng Bo, the founder of Livall, the Shenzhen-based smart bicycle helmet manufacturer, said that if the yuan strengthens to 6.25 against the US dollar, his business could start to see losses.
“The Chinese supply chain still has an absolute advantage, because the current supply chain in Southeast Asia cannot produce high-end smart sports helmets. So, back in December, we raised the factory price for the European Union market by 5 to 10 per cent, and still have the expected orders,” Zheng said.
“But we are keeping a close eye on the logistic prices and yuan. If the yuan trades beyond 6.25 [against the US dollar], it will be a problem for our business.”
China’s policymakers appear to be increasingly wary of the yuan’s strength, and the worsening Russia-Ukraine crisis could trigger more volatility in the foreign exchange market.
A stable yuan is an important prerequisite for Beijing to grow its exports, which remain integral to its economic growth.
Last year, China saw strong capital inflows under various channels such as trade, foreign direct investment, bond and equity markets, driving up demand for the yuan.
The surplus in goods trade in China reached US$555 billion in 2021 – the second-highest total in history – according to a research note by Macquarie Capital last month, citing a preliminary balance of payment data.
This week, the yuan appreciated to its strongest level since April 2018. China’s central bank has consistently set its daily benchmark for the yuan weaker than market forecasts, suggesting that the People’s Bank of China (PBOC) is wary of the yuan’s appreciation.
“Recently, rising commodity prices, turmoil in the international market, volatility in exchange rates, and geopolitical risks have all brought great challenges to our companies in foreign trade to maintain stable growth,” said Hu Xiaolian, chairman of the Export-Import Bank of China, on Wednesday.
“We think policymakers probably don’t mind seeing a modest yuan depreciation, which will help boost exports amid the current economic slowdown. But we do think they are concerned about the spillover effect of the US Fed’s policy tightening on emerging economies,” Oxford Economics said earlier this week.
A rate hike by the US Federal Reserve may trigger fund outflows from emerging markets, including from China – a concern that the PBOC has flagged in its last two quarterly monetary reports.
Analysts say the Chinese government could take further measures if needed to keep the yuan stable. Nomura said in a note this week that it expected the PBOC may step in to limit the yuan’s appreciation and to replenish its foreign exchange reserves.
Bob Yao, the co-founder of a digital printing production company in Guangdong, has been trying to boost the firm’s overseas market share, given weak demand back home. But now he’s not sure about whether to press on with his business-expansion plan.
“Our operating revenue of the domestic market last year was 40 million yuan (US$6.33 million), but we received payment for just third-quarters of all the goods sold,” Yao said. “Our cash flow is extremely tight.
“Now, suddenly, the international situation is getting so horrible and uncertain. It now goes beyond our years-long experience in exports to cope with what could happen next.”
