Chinese currency fluctuation disrupts U.S. retailing market
July 28, 2010
By Andrew Tananbaum
In late July, China announced the decoupling of its currency, the Renminbi (Yuan) from the U.S. dollar. For many economists and investors around the globe this is being viewed as a positive development. For U.S. exporters there is a real opportunity to increase their sales to the world’s second largest market as it will make U.S. produced goods more affordable to the average Chinese consumer.
However, for U.S.-based importers who make their living manufacturing goods in China and bringing them to retailers in the states, the strengthening of the Yuan will necessitate them taking into consideration the potential for greater currency fluctuations. These fluctuations will severely impact the margins on Chinese produced goods for importers.
The Yuan’s value, while trading in a limited range is already testing new highs. According to a recent Reuters story, “A . . . poll of 33 economists showed they expected the Yuan to end the year at 6.67 per dollar, a rise of 2.4% from late last week before China’s policy announcement and similar to the appreciation implied by offshore non-deliverable forwards.”
With a more fair valuation of the Yuan, the scale has effectively been tipped between the exporter and importer.
Greater fluctuations in the Yuan will force Chinese-based manufacturers to more carefully consider labor, raw material and shipping costs to produce goods. The reason for this is due to the 120 day average it takes from order placement from the United States to payment of a Chinese manufacturer. With a stable currency, margins are clearer, more predictable and easier to bank. With a market-based currency, Chinese manufacturers will face many of the same FOREX related hedge issues that other global manufacturing locales have had to deal with for decades.
Of equal importance to FOREX hedging, is the issue around payment timing. For years, U.S. importers and retailers have pushed for longer terms with the manufacturers. Today it is not uncommon for a manufacturer to get paid 90 days after the goods leave its facilities. For Chinese manufacturers, if the Yuan appreciates in value or is subject to more volatility, they will need to take into account that the purchase price of goods in Yuan may change from when the order is taken so there is potential the manufacturer may loose significant dollars on orders.
From our vantage point, as trade finance experts, we believe there is the potential for manufacturers to place pressure on importers to reduce trade terms or seek early payment solutions to mitigate foreign exchange risk. We expect to see more vendors approaching their clients looking to re-negotiate terms over the next year. Manufacturers may also begin to build in this risk in the price of goods, making the cost to produce in China more expensive which will translate to price increases for retailers.
Additionally, alternative locations for manufacturing like Vietnam, Pakistan and Bangladesh may become more viable options for importers, where the currency risk is less and the cost of labor cheaper. However, these locations are not vertically integrated like China. This means that everything needed to make a garment, i.e. the thread, buttons and fabric will need to be imported from elsewhere.
In summary, smart importers and retailers need to be monitoring developments in China closely and expect changes ahead. Even with the currency risk, China may very well be the best option for many who import mid- to high-priced goods. For others, it may be time to seek out new options.
Andrew Tananbaum is president and CEO of Capital Business Credit (CBC) (www.capitalbusinesscredit.com), a commercial finance company specializing in providing creative supply chain financing solutions. CBC is the largest privately held full service factoring company in the United States. It is headquartered in New York, with offices in Hong Kong; Los Angeles; Charlotte, NC; and Ft. Lauderdale, Fla.
Tananbaum has been in the factoring business for nearly 30 years and has been with CBC since 2005. He was formerly President and CEO of Century Business Credit Corporation, a subsidiary of Wells Fargo & Co.