Source: China Trade – China Trade News website by Liu Guomin
The yuan rose 128 basis points to 6.6642 against the US dollar on Friday, the fourth day in a row. The onshore yuan rose more than 500 basis points against the dollar this week, its third straight week of gains. According to the official website of the China Foreign Exchange Trade System, the central parity rate of RMB against US dollar was 6.9370 on December 30, 2016. Since the beginning of 2017, the yuan has appreciated about 3.9% against the dollar as of Aug. 11.
Zhou Junsheng, a well-known financial commentator, said in an interview with China Trade News, “The RMB is not yet a hard currency internationally, and domestic enterprises still use the US dollar as the main currency in their foreign trade transactions.”
For companies engaged in dollar-denominated exports, a stronger yuan means more expensive exports, which will increase sales resistance to some extent. For importers, the appreciation of the YUAN means that the price of imported goods is cheaper, and the import cost of enterprises is reduced, which will stimulate imports. Especially given the high volume and price of raw materials imported by China this year, the appreciation of the yuan is a good thing for companies with large import needs. But it also involves when the contract for imported raw materials is signed, the terms of the contract are as agreed to exchange rate changes, valuation and payment cycle and other issues. Therefore, it is uncertain to what extent relevant enterprises can enjoy the benefits brought by RMB appreciation. It also reminds Chinese enterprises to take precautions when signing import contracts. If they are big buyers of a certain bulk mineral or raw material, they should actively exert their bargaining power and try to include exchange rate clauses that are more secure for them in the contracts.
For enterprises with us dollar receivables, RMB appreciation and US dollar depreciation will reduce the value of the us dollar debt; For enterprises with dollar debts, the appreciation of RMB and the depreciation of USD will directly reduce the debt burden of USD. Generally, Chinese enterprises will pay off their debts in USD before the RMB exchange rate falls or when the RMB exchange rate is stronger, which is the same reason.
Since this year, another trend in the business community is to change the style of precious exchange and insufficient willingness to settle exchange during the previous devaluation of the RMB, but choose to sell the dollars in the hands of the bank in time (settle exchange), so as not to hold dollars for longer and less valuable.
Companies’ responses in these scenarios generally follow a popular principle: when a currency appreciates, people are more willing to hold it, believing it is profitable; When a currency falls, people want to get out of it as soon as possible to avoid losses.
For companies looking to invest abroad, a stronger yuan means that their yuan funds are worth more, which means they are richer. In this case, the purchasing power of enterprises’ overseas investment will increase. When the yen rose rapidly, Japanese companies accelerated overseas investment and acquisitions. However, in recent years, China has implemented the policy of “expanding the inflow and controlling the outflow” on cross-border capital flows. With the improvement of cross-border capital flows and the stabilization and strengthening of RMB exchange rate in 2017, it is worth further observing whether China’s cross-border capital management policy will be loosened. Therefore, the effect of this round of RMB appreciation to stimulate enterprises to accelerate foreign investment also remains to be observed.
Although the dollar is currently weak against the Yuan and other major currencies, experts and media are divided on whether the trend of a stronger yuan and a weaker dollar will continue. “But the exchange rate is generally stable and will not fluctuate as it did in previous years.” Zhou junsheng said.
Post time: Mar-23-2022