Exchange rate "shock" Linyi foreign trade has not decompressed export orders still little improvement
In 2014, the foreign exchange market witnessed a major shift as the Chinese yuan experienced a significant appreciation against the US dollar. This trend began in mid-January and intensified throughout February, with the depreciation of the yuan becoming even more pronounced by March. The Linyi City Bureau of Commerce conducted an investigation and found that the RMB had moved away from a "two-way market" and was primarily depreciating. While this development had some positive outcomes, its immediate impact on the city's foreign trade remained limited. Companies faced challenges such as insufficient orders, squeezed profit margins, and reduced competitiveness.
According to the survey, many businesses were hesitant due to the high level of the RMB exchange rate, which led to a lack of confidence in long-term operations. Large or long-term orders were hard to come by, and most foreign trade companies opted for short-term contracts to minimize the risk of rapid RMB appreciation. About 60% of the orders held by companies lasted less than a month, while only 20% extended between one and three months. Orders lasting six months or longer were rare. For example, export companies like Huasheng Pharmaceutical and Sanhe Yongjia mainly handled short-term orders, while Qingguo Foods Co., Ltd. typically exported goods with a 45-day contract period.
Profit margins were also under pressure. Many orders were signed a month or two before execution, but companies could not predict the rapid appreciation of the yuan. As a result, some orders were executed with minimal profits, and others were carried out at a loss to retain customers. In December of the previous year, Linyi’s exports totaled $473 million, but the difference in exchange rates at the start and end of the month led to a revenue loss of 16.84 million yuan during settlement. Additionally, labor-intensive industries such as wicker crafts, toys, and ceramics faced rising labor costs, which further compressed profit margins. With wages increasing significantly and product prices struggling to keep up, companies found themselves in a difficult position.
The competitiveness of local export enterprises also suffered. High RMB exchange rates forced some companies to adopt strategies like locking in exchange rates or using financial instruments to manage risks. Others raised prices to offset losses, which often led to customer dissatisfaction. Small and medium-sized enterprises with weak bargaining power were forced to sacrifice profits just to maintain orders. Labor-intensive products, which relied heavily on low-cost advantages, saw their profit margins shrink further due to the yuan's appreciation. Countries like Indonesia and Vietnam, with lower labor costs, posed a growing challenge to Linyi’s export industry.
From an industry perspective, sectors such as textiles, agricultural products, and diamond processing were hit hardest due to already low profit margins. A 1% appreciation of the yuan could reduce operating profits by as much as 12% in the cotton textile industry and 8% in the wool textile sector. Companies like Mengyin County Hongda Textile Co., Ltd. saw a sharp decline in exports over the years. Statistics showed that textile, garden machinery, peanut products, and diamond exports in Linyi fell by 19.5%, 61.9%, 11.7%, and 8.6%, respectively, in 2013.
From a market standpoint, customers in Southeast Asia, Africa, and South America were more open to RMB settlements, which helped mitigate the impact of yuan appreciation. However, European and American customers generally resisted RMB payments, leading to greater exposure to exchange rate fluctuations. Additionally, the structure of Linyi’s exports—largely based on raw materials and primary products—meant that their competitive edge was largely price-driven. Without strong brand recognition, they struggled to compete in global markets.
Businesses were increasingly eager to settle transactions quickly. Guo Xingmei, General Manager of Shandong Baihua Shoes, highlighted how the yuan's depreciation provided relief to foreign trade companies. He noted that timely settlement allowed them to benefit from favorable exchange rates. However, he also pointed out that manufacturing profits remained thin, with domestic footwear companies facing stiff competition from Southeast Asian counterparts and high tariffs in Western markets. The key issue, according to Guo, was the lack of skilled industrial workers, which hindered efficiency and quality.
Experts suggested that cross-border RMB settlement should be prioritized to help businesses better manage exchange rate risks. They recommended promoting RMB settlement policies, offering incentives, and implementing pilot projects to support international trade reforms. By improving the use of RMB in pricing and settlements, enterprises could gain more control over their financial outcomes.
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