When the value of the US Dollar falls or the Chinese Yuan gets stronger, factories in China need to review pricing. Many factories buy a lot of their raw materials USD and sell to clients (even those in Europe) in USD. However, staff and other local fixed costs are strongly factored in RMB. If you take low margins and are paid in USD, then when the exchange rate falls you can experience losses.
Factories can hedge risks either short term or long term with banks and other financing companies. You might consider Factoring invoices or shortening credit terms with clients. Others charge a risk premium increasing their prices, common with factories. Another option is to purchase foreign currency in advance. Which ways will you protect yourself from the risks? Check out our case study on promos with HSBC Export Financing.
RMB reaches an all-time high value:
On September 8th, Chinese Yuan reached the highest level since December 2015 – 6.4392 USD/CNY, even though it had been holding position over 6.8 for half a year. Check out a 1-year graph here.
Implications of increased value:
This is making it not profitable for national exporters and businesses in China, and the factories which were charging for the orders in USD before. Recently some of our factories are requesting clients to invoice in CNY or RMB local currency to avoid losses when converting from USB to RMB. Moreover, when you are getting pricing in USD some factories have offered just price validity 15 days, instead of regular 30 days.
However, as the exchange rate fluctuations are affecting the exporters, some factories are expecting more efforts to try to stabilise Yuan and fix it on a certain level.
Here is a graph covering the exchange rates over a 10 year period. You will see that exchange rates really do impact pricing and this will even impact pricing on orders which are not for the USA.
According to ForexLive, on September 12th “People’s Bank of China sets USD/CNY central rate at 6.5277 (vs. yesterday at 6.4997) for the USD/CNY reference rate setting today. So the bank recognising the much stronger USD overnight and weakening the CNY after a long string of daily mid-rate strengthenings”
Secure your order – allocate deposit sooner than later to avoid price changes!
Contact ODM Group for Sourcing projects from China, Production Management, and Quality Control.
Frequently asked questions:
Does the currency exchange rate always change?
Yes. The foreign exchange market will always fluctuate according to demand and supply of money.
Is the exchange rate the same with every broker?
More or less, the exchange rate should be the same. However, it might cost extra for certain brokers, depending on their transaction fees.
Is the RMB stronger than USD?
Not always. Currencies can depreciate and appreciate. Therefore there is no uncertainty to which currency has more purchasing power.