China’s exporters shun the yuan, embrace alternatives as depreciation fears build
- With China’s yuan unable to keep pace with the US dollar, the country’s exporters are storing value elsewhere and only converting back what they need
- Currency volatility one of several factors impacting overseas business, as low profits create perilous situation for international operators
The recent volatility of the yuan, depressed profits and unexpected shifts in external demand are combining to make some Chinese exporters less sanguine about their business prospects – and more likely to park their assets in anything but the national currency.
“At the beginning of this year, it became clear that my circle of friends, all of whom are exporters, were short of US dollars,” said a Guangdong-based manager in the textile equipment industry. The manager, who elected to remain anonymous, has a nearly US$1 million investment in a US factory.
“Perhaps, on the one hand, it is because the economy and exports are not that good, and everyone is earning fewer dollars. On the other hand, companies like us that are developing markets overseas have also encountered difficulties.”
Meanwhile, the yuan has dropped about 2.1 per cent against the US dollar since the start of this year, driving many exporters to hold onto their US dollars and only converting what is necessary.
“In the past two years, some merchants I know have put their foreign trade receivables in Hong Kong first, and then remitted as much as they needed,” said Liu Kaiming, a supply chain specialist who has partnered with many global brands.
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Due to large interest rate differentials between China and the US, regular inflows from domestic exporters have dried up. Businesses have chosen to keep their US dollars offshore in deposits that earn them over 5 per cent – compared to around 1.5 per cent on yuan deposits at home – and wait for better exchange rates.
“Goods trade surplus has risen notably since 2020 and underpinned China’s decent current account surplus. However, the transmission from trade surplus to foreign exchange selling has been weakened in the face of more attractive US dollar interest rates,” Bank of America said, adding that US dollar demand from bank clients continues to outweigh supply.
Although the cost of loans [in China] is lower than before, we can’t even earn back the interest on the loans, so we don’t borrow
“Most companies are now unable to make money. Although the cost of loans [in China] is lower than before, we can’t even earn back the interest on the loans, so we don’t borrow,” Gao said.
“Profits earned from foreign trade will be used by companies going overseas to operate and invest in overseas markets, or turned into US dollar deposits. However, some profits still need to be converted into yuan for purchasing raw materials and [paying for] production.”
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“This behaviour of diversifying investments globally to hedge domestic risks will naturally cause massive short-term capital outflows [from China] and intensify the pressure on the yuan to depreciate against the US dollar,” said the think tank in a report on Thursday.
Expectations are for the yuan to stay weak until there are clear signs that a rate cut is back on the table for the Federal Reserve and the US dollar softens.
Although there is some optimism for China’s exports, analysts argued lower prices for Chinese goods might not be sustainable and could also stoke trade tensions.
“The reality is that, even with falling export prices, China has not managed to increase exports until very recently, opening a big question mark as to whether the rest of the world will willingly absorb China’s additional manufacturing capacity,” said French investment bank Natixis on April 16.
“China’s exports are still very strong,” said Liu, the supply chain specialist. “[We expect] China’s central bank will be able to take the pressure.”
