The unilateral appreciation of the RMB exchange rate has forced foreign trade companies to go into trouble

For the foreign trade industry, which is the most sensitive to exchange rates, it has also experienced ten years of turmoil with the reform of the RMB exchange rate system.
Analysts pointed out that the RMB exchange rate from 8.11 to 6.20 seems to be a small numerical change on the surface, but behind it is the upgrade of technology and products, as well as the leap from traditional industrial thinking to financial thinking. At present, exchange rate marketization is imminent and the flexibility of the RMB exchange rate has increased. Foreign trade companies will need to consider all aspects if they want to meet the challenges.
​The unilateral appreciation of the RMB exchange rate has forced foreign trade companies to transform and upgrade
Although theoretically speaking, the unilateral appreciation of the RMB has put pressure on export companies, this decade has also provided trading companies with opportunities to rapidly transform and upgrade their products and service models.
Shaoxing Feiang Textile Co., Ltd. is an enterprise engaged in the export of textile products, mainly exporting to Asia, Africa, Latin America and other countries. When the company was established in 2007, it was not large in scale, with an annual trade volume of only 10 million to 15 million yuan. Today, the annual trade volume is nearly 40 million US dollars.
Li Chunwei, deputy general manager of the company, told reporters that textiles are a traditional industry with low added value, low entry barriers, fierce competition, and changes in exchange rates have a greater impact on profit margins. In the past nearly ten years, it has been a process of ups and downs for textile export companies. He has witnessed with his own eyes the disappearance of a considerable number of enterprises and even the rapid shrinkage of a branch industry.
“The appreciation of the exchange rate does not affect one company, but the entire industry. For example, some products are in demand in foreign markets, but the technology and production capacity cannot meet the market demand, so even if the cost of Chinese products increases, they still have to purchase from China. However, , those products with relatively low technical and quality thresholds have begun to be produced abroad. Coupled with the appreciation of the RMB, China’s export products will soon lose their competitive advantage, and the market for first-class products will shrink almost instantly. The product needed now is the unit A higher value product,” he said.
Meng Zhuo, Japan manager of Anhui Garment Import and Export Co., Ltd., told reporters that although the RMB has fluctuated in the past ten years, the general direction has been unilateral appreciation. Most export-oriented companies have still lost profits, and some companies have even shrunk. The collapse will have a big impact on foreign trade companies. Even large state-owned enterprises like his company are having a hard time. “The appreciation of the RMB has forced companies to shift from purely low-end products to products with high added value. At the same time, companies have also shifted from purely foreign trade companies to conducting part of domestic trade,” he said.
Yi Bing is the purchasing director of a Fortune 500 American company. He said that if the RMB did not appreciate and the exchange rate was still locked, perhaps the result would be no progress in the past ten years and the gap with trading companies in Europe, the United States, Hong Kong and Taiwan would continue to widen. “In my personal opinion, this international and market-oriented exchange rate system has actually given us a harsh fact objectively, forcing everyone to abandon the old thinking of relying on policies for survival and instead rely on improving products and services to compete in international competition. Survive,” he said.
On July 21, 2005, the People’s Bank of China [Weibo] issued an announcement on improving the reform of the RMB exchange rate formation mechanism, announcing that my country will begin to implement a managed floating exchange rate system based on market supply and demand and taking into account a basket of currencies for adjustment. This signifies that the RMB exchange rate is no longer pegged to a single U.S. dollar and the exchange rate formation mechanism is more flexible. The trading price of the U.S. dollar against the RMB was adjusted from the original 8.2765 yuan per U.S. dollar to 8.11 yuan. At the same time, the daily trading price of the U.S. dollar against the RMB in the inter-bank foreign exchange market still follows the floating range of three thousandths of a percent above or below the central parity rate since 1994.
According to data from the Bank for International Settlements (BIS), since the RMB exchange rate reform in 2005 to December 2014, the nominal effective exchange rate and real effective exchange rate of the RMB have appreciated by 40.51% and 51.04% respectively, and they have appreciated by 35.26% and 35.26% respectively against the US dollar, the euro and the Japanese yen. 34.32% and 44.22%.
Zhou Xiaochuan, governor of the People’s Bank of China, said in a 2009 interview that exchange rate reform involves improvement time for export companies, including how to gradually adjust products and processes and win some pricing power. In fact, the pricing power of Chinese companies has gradually expanded. Our survey found that Chinese companies also have strong adjustment capabilities.
​From industrial thinking to financial thinking
The changes brought to China’s foreign trade companies by the exchange rate reform are not only the upgrade of technology and products, but also the connection between industrial and financial thinking.
In 2005, Ningbo Yahu Import and Export Co., Ltd. was established for 10 years. The company is mainly engaged in the export of department stores, with Europe and the United States as its main export destinations. Ms. Gong, the person in charge of the company, told this newspaper that from the 1990s to around 2000, the main channel for foreign procurement was through middlemen in Hong Kong and Taiwan, and there were not many domestic and foreign trade companies. In the ten years to 2005, with the rapid expansion of the domestic and foreign trade industry, the company also grew rapidly. Currently, the company’s annual trade volume reaches US$170 million.
But after 2005, the situation seemed to have changed, and the RMB exchange rate began to appreciate rapidly unilaterally. Prior to this, during the ten years when the RMB was pegged to the US dollar, the exchange rate remained relatively stable, and whetherValue or depreciation is relatively slow. “Foreign trade companies will not pay too much attention to the financial aspect until the exchange rate begins to appreciate unilaterally. The company’s foreign exchange settlement cycle is usually 90 to 120 days, so it also begins to try to use financial derivatives for technical hedging. The company Special personnel will also be assigned to keep an eye on changes in the exchange rate,” she said.
Meng Zhuo also said that in terms of the nature of the enterprise, import and export entities, as foreign exchange began to have an increasing impact on the market, forced the company to add some simple financial services, such as locking foreign exchange, arbitrage, etc., which enabled the company to transform from a simple trade company, transforming into a company with all-round comprehensive strength.
“What we adopt is good risk control, strict control of payment methods, and good credit insurance to control risks. On the other hand, we use US dollars, euros, Canadian dollars, Hong Kong dollars and other currencies to operate different customer orders to balance risks. There are also The more important point is to use bank lock-up to control forward risks when the exchange rate is unstable and fluctuates severely,” Yi Bing told reporters.
However, compared with large enterprises, state-owned enterprises, and foreign enterprises, Li Chunwei’s small private enterprises are more difficult. He told reporters that textiles are traditional industries with low added value, and the profits themselves are relatively thin. The cost of purchasing financial derivatives is even higher than the maximum loss that may be caused by the exchange rate. For a long time, its company has basically adopted the method of spot cash payment, that is, after the goods are shipped, the customer must settle the account immediately, so as to reduce the risk of exchange rate fluctuations that may arise during the settlement cycle. But even so, there will still be a lag of 20 days or even a month before the money arrives.
“There is no particularly good way now, which is to make products with high added value. Even if the exchange rate changes, the profit will be less, but there is still room to bear it.” Li Chunwei said that he is also expanding the market to Europe. Compared with Countries in Asia, Africa, Latin America and other countries have higher profit margins.
In order to avoid exchange rate risks, the company has currently established offices abroad. “For example, when I am in Dubai, the payment I may receive is dirhams or US dollars. I can arrange to remit the money domestically or not according to changes in the exchange rate, thereby enhancing my autonomy in settlement of foreign exchange,” Li Chunwei said.
​Face exchange rate marketization in an all-round way
In 2015, China’s monetary authorities announced that RMB capital account convertibility will be achieved within the year. The market-oriented reform of the exchange rate is an important prerequisite for the convertibility of the RMB capital account, which means that the fluctuation range of the RMB exchange rate may further expand in the future and the flexibility of the RMB exchange rate will increase.
Looking back on the past ten years, the daily fluctuation range of the RMB exchange rate expanded from 0.3% to 0.5% on May 21, 2007, from 0.5% to 1% on April 14, 2012, and from 1% to 1% on March 15, 2014. % expanded to 2%. Some insiders predict that this fluctuation range may expand to 3% or even greater to 5%.
Li Chunwei said bluntly that he is not afraid of unilateral appreciation or depreciation, but is afraid of large fluctuations. If exchange rate fluctuations increase in the future, for example, expanding to a 5% floating range, the risks to export companies will further increase. In this regard, he considered making a fuss about the agreements signed with customers. “One is that the customer’s payment method can be negotiated, and the deposit and advance payment should be larger; secondly, the agreed exchange rate is within a certain range of changes, which is borne by us. If it exceeds this range, the customer needs to bear some.” He said The reporter said that these are all ideas and have not yet been implemented.
Ms. Gong said that in the future, foreign trade companies must be linked to financial institutions, and companies must also set up specialized departments for exchange rate hedging. Although industrial companies cannot focus on this, the domestic financial derivatives market is now slowly developing. , her attitude is to wait and see the changes and enjoy the results.
At the same time, Ms. Gong emphasized that foreign trade is a competitive system composed of multiple variables. The exchange rate is only one part of it. The bigger ones are raw material prices, land costs, labor costs, etc. Currently, the biggest pressure comes from rising land costs and labor costs.
Now, the procurement network has shifted from the southeastern coast to the inland. For example, initially they would choose manufacturing companies in Ningbo for procurement, but now they are considering lower-cost inland areas such as Anhui, Jiangxi, and Henan. In addition, in terms of corporate management, domestic intellectual property protection is very weak, which requires more efforts in corporate culture construction to improve the company’s overall strength.
Meng Zhuo said that from the current point of view, the Japanese yen and the euro are depreciating, and China’s current exchange rate is relatively difficult for foreign trade companies. On the one hand, the company supports exports by expanding imports. When the RMB appreciates, the company imports some raw materials from India, Pakistan and other places every year to reduce the cost of textiles. On the other hand, the company also has factories in Southeast Asia where labor costs and land costs are lower. Invest and operate to adapt to the new exchange rates.