Weakening of the Chinese Yuan

by Kevin Kahn and Jin Kong

Photo by Seongjoon Cho/Bloomberg

Photo by Seongjoon Cho/Bloomberg

China’s gradual devaluation of currency has gotten much attention lately. It has stirred speculations from deliberate currency war to a weakened economy signaling troubles ahead. In all likelihood, China is trying to stimulate more exports and remain competitive domestically against foreign imports. But as the RMB becomes a reserve currency, China is also very keen on keeping it stable and the fluctuations narrow.

A weaker RMB against the dollar does mean higher prices for selling US-made goods in China. Although China is transitioning into a consumption based economy, the pace of consumption is nowhere near where it would be if China was still on double digit growth. As of late, China’s growth is mostly concentrated in exports and it is questionable if importing into China is as easy and lucrative as others would make us believe.

Not surprisingly, the RMB has strengthened against the British Pound. China and Britain have also been forging ever-closer relationships. While we can speculate whether China can be the saving grace to the controversial Brexit vote, we are certain the currency fluctuations have made British-manufactured goods more competitive in China than US-manufactured goods.

It is important to remember China is still a centrally planned economy and its currency devaluation is very much deliberate and strategic, likely independent of any foreign influences. It is important to be proactive; after all, it is much more productive to flow with the changes than to complain against it. There is not much one can do about the Chinese government’s policies but as Bruce Lee once said, be like water.

Frequent evaluation of the exchange rate and aggressive negotiation of prices is key to staying ahead and maximizing your margins. If you are sourcing from China and you have not received a price reduction from your vendors, now is a good time to push for one. Generally accepted revaluation practice, if not outlined in a contract, is a 3% swing in pricing. With a 4.6% devaluation in 2016, it is worth the effort to ask for a reduction in pricing on Chinese purchased goods.

If you are selling to China, you may want to reevaluate your business operations and hedge against risks where you can. Since you will need to evaluate the structural and transaction risks more carefully, diligence and completeness is key. Adjusting the sales price is only one way, the key is to focus on cash-flow, supply chain, competitor actions, and consumer preferences in China. It may be difficult to hedge against risks with pricing adjustments alone, but process innovation and efficiency improvements together can be helpful.

For those seeking investors from China, now would be a very advantageous time to reach out, as Chinese businesses and personal investors alike are looking for opportunities to invest in foreign denominated investments – to hedge their assets against a declining Yuan.

If you would like to explore ways to strengthen your business opportunities with China, Kevin Kahn of K2 Industrial Controls Int’l Ltd and Jin Kong of Kong Esq., LLC can be of assistance. Just contact us at info@china-midwest.com to get connected.

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