Exchange rate "shock" Linyi foreign trade has not decompressed export orders still little improvement

In the context of global trade, the competition is not only about products but also about currency dynamics. In 2014, a major event in the foreign exchange market was the unexpected appreciation of the Chinese yuan against the U.S. dollar. The depreciation started in mid-January and accelerated in February, with further declines observed from March onward. According to an investigation by the Linyi City Bureau of Commerce, the RMB exchange rate moved beyond the "two-way market" and mainly depreciated. While this led to some positive outcomes, it had limited short-term impact on the city’s foreign trade. Businesses faced challenges such as insufficient orders, squeezed profit margins, and reduced competitiveness. The survey revealed that due to the high level of the RMB exchange rate, many enterprises lacked confidence in long-term operations. They struggled to secure large or long-term orders, resulting in a preference for short-term contracts to minimize risks associated with rapid RMB appreciation. Most companies held orders within one month (about 60%), while those lasting 1-3 months accounted for 20%, and orders over six months were rare. For example, export orders from Huasheng Pharmaceutical and Sanhe Yongjia were primarily short-term, and Qingguo Foods Co., Ltd. typically had export orders to the U.S. lasting around 45 days. Corporate profits were also under pressure. Many orders executed by local businesses were signed a month or two earlier, and despite efforts to mitigate exchange rate risk, the sudden appreciation of the RMB left some companies operating with minimal profits or even losses. For instance, the difference in exchange rates between the beginning and end of December 2013 resulted in a revenue loss of 16.84 million yuan for Linyi’s exports worth 473 million U.S. dollars. Additionally, labor-intensive industries such as wicker crafts, toys, and ceramics saw rising wages—up to 3,000 yuan per month for some workers—while product prices remained constrained, leading to thinner profit margins. Rising raw material costs due to inflation further eroded profitability. The competitiveness of local export enterprises was also affected. High RMB exchange rates forced companies to adopt strategies like locking in exchange rates or increasing prices, which often led to customer losses. SMEs with weak bargaining power had to sacrifice profits to retain orders. Labor-intensive sectors, which rely on low-cost advantages, faced significant challenges as their profit margins were already low—often below 3%. Competitors in countries like Vietnam and Indonesia, with lower labor costs, added further pressure. Meanwhile, emerging markets in the Philippines, Thailand, India, and Brazil, along with currency devaluations in Japan and South Korea, intensified the competitive landscape. From an industry perspective, sectors like textiles, agricultural products, and diamond processing experienced sharp declines due to low profit margins. A 1% appreciation of the yuan could reduce cotton textile industry profits by 12% and wool textile profits by 8%. For example, Mengyin County Hongda Textile Co., Ltd. saw its exports drop significantly over three years. Overall, Linyi's textile, garden machinery, peanuts, and diamond exports 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, reducing the impact of yuan appreciation, whereas clients in the EU and U.S. resisted RMB payments, making the impact more severe. Export products in Linyi were largely raw materials or primary goods, with low added value and small profit margins. This made them vulnerable to price sensitivity in international markets. The yuan’s appreciation further weakened their price advantage, leading to a 30% year-on-year drop in orders for some Liubian enterprises, with three companies closing and four operating at half capacity. Businesses are now rushing to settle transactions. Shandong Baihua Shoes General Manager Guo Xingmei noted that the RMB’s depreciation provided relief for foreign trade companies. She recently converted $200,000 into RMB at a favorable rate, boosting her net profit. However, she emphasized that manufacturing profits remain thin, and the domestic footwear industry faces stiff competition from Southeast Asian counterparts. Tariffs in Europe and the U.S. have led to production stagnation, highlighting the need for industry upgrades. Yet, the lack of skilled labor remains a critical bottleneck. Guo Xingmei pointed out that even with a 95% pass rate in individual production steps, the overall qualified rate of finished products dropped to 77%, costing the company over 150,000 yuan annually in losses. Comparing this to developed nations, she stressed the urgent need to improve worker skills and adapt to the post-demographic dividend era. Experts recommend accelerating cross-border RMB settlement to help businesses better manage exchange rate risks. They suggest promoting RMB settlements, offering incentives, and implementing pilot projects to support international trade reforms. With the yuan entering a “two-way era,” businesses must adapt to new financial realities and enhance their resilience in the global market.

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