Yuan change well off radar of China's exporters
Lucy Hornby - Analysis
BEIJING
Tue Feb 9, 2010 9:04am EST
Factbox
BEIJING (Reuters) - The United States is once more ratcheting up pressure on Beijing to let its currency appreciate, but for many of China's small exporters the issue is not even on their radar.
China
In marked contrast to the lead-up to China's 2005 revaluation, when rumors of a change swept Asian markets daily, there is very little discussion these days in China beyond economists' circles of allowing the yuan to resume its rise.
Several private export firms contacted by Reuters say they have taken no precautions against an exchange rate shift.
That could be a sign that, despite the hopes of officials in Washington, China has no immediate intention of ending its de facto peg of 6.83 yuan to the dollar, in place since mid-2008 to help exporters ride out the global financial crisis.
"It shows they haven't been prepared. If you were a cautious senior official, you'd think you'd give the export sector a heads up," says Stephen Green, head of research for Greater China at Standard Chartered Bank in Shanghai, who does not expect any movement in the yuan before the third quarter.
"We think it's still too early. If the State Council is picking up the phone and talking to exporters, they'd be hearing the story that it's still hard for them."
Despite surprisingly strong December export data, many of the private Chinese firms that supply the world with T-shirts, toys and teacups are still struggling for new orders and profits.
Green estimates that exports are still about 20 percent short of their pre-crisis peak and may not regain those levels until mid-2011. Chinese officials say that exports need to recover before the yuan begins to rise again.
The Obama administration has said the currency is its top priority in strategic talks with China, but could be disappointed if China is not prepared to move for its own domestic reasons.
"Everyone sees the exchange rate as stable around 6.83. No one's thinking of a change. If it changed, there would be too much harm. The whole export sector would suffer," says Jimi Pang, a trader for an international steel trading house.
"Steel is OK, but in other industries like furniture or clothing the margins are too thin. They'd go from barely profitable to big losses if the yuan started appreciating."
CAUTION
Repegging the yuan has been a boon to China's exporters, who don't need to hedge currency risk when offering razor-thin margins on a contract. They also benefited from last year's slide in the dollar, which helped keep Chinese exports competitive against those from other developing countries.
Many inexperienced exporters suffered when the yuan, after being pegged for more than a decade at 8.28 to the dollar, was revalued by 2.1 percent in 2005 and then set free to float within a tightly managed band.
Immediately after the shift in currency regime, many exporters did write provisions for exchange rate fluctuations into their contracts. But they stopped once the yuan stabilized, says industry and trade consultant Sun Jianliang.
"There's not a lot of talk about this," Sun says.
Chinese companies often get hints from ministries and state-backed industry associations when policies are about to alter. For instance, the steel industry usually anticipates export tariff adjustments by adding a clause to contracts specifying which side will shoulder the additional cost.
Most small exporters, many of whom turn around contracts in just a few months, do not currently include a similar clause for any move in the value of the yuan.
That's particularly true in the highly competitive textile industry, where orders are rushed through to keep up with fashion and margins leave no room for error, business managers say.
"Our contracts are signed according to the spot exchange rates, and we don't commit ourselves beyond three months," says a manager surnamed Li at Cathaylink Import and Export Co, which makes Chinese crafts.
"Beyond that, it's too risky. Nobody can tell how the exchange rate will change."
A trade official from Yiwu, a manufacturing and wholesale trade hub in eastern China, says exporters are flocking to trade shows overseas with no obvious concerns about the appreciation of the yuan.
Some firms, however, are worried.
"We're thinking of developing sales into Europe because we are afraid the U.S. dollar will start moving," says Johnny Chan, whose family business sells unfinished coat hangers to Vietnam for completion and export to the United States.
"Our profit margins are already very low because we have to go through a middleman," he says. "If the dollar starts to change, small businesses like us can only raise prices, and that would remove the margin."
(Additional reporting by Beijing Newsroom; Editing by Alan Wheatley and Jeremy Laurence)
Lucy Hornby - Analysis
BEIJING
Tue Feb 9, 2010 9:04am EST
Factbox
BEIJING (Reuters) - The United States is once more ratcheting up pressure on Beijing to let its currency appreciate, but for many of China's small exporters the issue is not even on their radar.
China
In marked contrast to the lead-up to China's 2005 revaluation, when rumors of a change swept Asian markets daily, there is very little discussion these days in China beyond economists' circles of allowing the yuan to resume its rise.
Several private export firms contacted by Reuters say they have taken no precautions against an exchange rate shift.
That could be a sign that, despite the hopes of officials in Washington, China has no immediate intention of ending its de facto peg of 6.83 yuan to the dollar, in place since mid-2008 to help exporters ride out the global financial crisis.
"It shows they haven't been prepared. If you were a cautious senior official, you'd think you'd give the export sector a heads up," says Stephen Green, head of research for Greater China at Standard Chartered Bank in Shanghai, who does not expect any movement in the yuan before the third quarter.
"We think it's still too early. If the State Council is picking up the phone and talking to exporters, they'd be hearing the story that it's still hard for them."
Despite surprisingly strong December export data, many of the private Chinese firms that supply the world with T-shirts, toys and teacups are still struggling for new orders and profits.
Green estimates that exports are still about 20 percent short of their pre-crisis peak and may not regain those levels until mid-2011. Chinese officials say that exports need to recover before the yuan begins to rise again.
The Obama administration has said the currency is its top priority in strategic talks with China, but could be disappointed if China is not prepared to move for its own domestic reasons.
"Everyone sees the exchange rate as stable around 6.83. No one's thinking of a change. If it changed, there would be too much harm. The whole export sector would suffer," says Jimi Pang, a trader for an international steel trading house.
"Steel is OK, but in other industries like furniture or clothing the margins are too thin. They'd go from barely profitable to big losses if the yuan started appreciating."
CAUTION
Repegging the yuan has been a boon to China's exporters, who don't need to hedge currency risk when offering razor-thin margins on a contract. They also benefited from last year's slide in the dollar, which helped keep Chinese exports competitive against those from other developing countries.
Many inexperienced exporters suffered when the yuan, after being pegged for more than a decade at 8.28 to the dollar, was revalued by 2.1 percent in 2005 and then set free to float within a tightly managed band.
Immediately after the shift in currency regime, many exporters did write provisions for exchange rate fluctuations into their contracts. But they stopped once the yuan stabilized, says industry and trade consultant Sun Jianliang.
"There's not a lot of talk about this," Sun says.
Chinese companies often get hints from ministries and state-backed industry associations when policies are about to alter. For instance, the steel industry usually anticipates export tariff adjustments by adding a clause to contracts specifying which side will shoulder the additional cost.
Most small exporters, many of whom turn around contracts in just a few months, do not currently include a similar clause for any move in the value of the yuan.
That's particularly true in the highly competitive textile industry, where orders are rushed through to keep up with fashion and margins leave no room for error, business managers say.
"Our contracts are signed according to the spot exchange rates, and we don't commit ourselves beyond three months," says a manager surnamed Li at Cathaylink Import and Export Co, which makes Chinese crafts.
"Beyond that, it's too risky. Nobody can tell how the exchange rate will change."
A trade official from Yiwu, a manufacturing and wholesale trade hub in eastern China, says exporters are flocking to trade shows overseas with no obvious concerns about the appreciation of the yuan.
Some firms, however, are worried.
"We're thinking of developing sales into Europe because we are afraid the U.S. dollar will start moving," says Johnny Chan, whose family business sells unfinished coat hangers to Vietnam for completion and export to the United States.
"Our profit margins are already very low because we have to go through a middleman," he says. "If the dollar starts to change, small businesses like us can only raise prices, and that would remove the margin."
(Additional reporting by Beijing Newsroom; Editing by Alan Wheatley and Jeremy Laurence)