Exporters, importers and travellers have found themselves caught in the middle of China’s yuan falling to a 16-year low against the US dollar, with the prices of their transactions left hanging in the balance.
The offshore yuan traded at 7.36 per US dollar on Friday, with the uncertain outlook for China’s economy and the recent rally by the US dollar following upbeat data partly behind the weakness.
The yuan slipped by 1.1 per cent last week against the US dollar, taking declines this year to 5.7 per cent.
Some Chinese exporters prefer a weak yuan, allowing them to exchange US dollars from overseas sales for more yuan, while others are under pressure to change prices.
“Some of our customers have requested price reductions for new orders, due to the weaker yuan,” said Hangzhou-based textile manufacturer Guo Ping.
“Taking the Indian and Saudi markets as examples, our price for the cheapest fabric style has dropped from 82 US cents per metre to 78.”
Small exporters usually have limited capacity to hedge against yuan volatility.
Guo expects the yuan to rebound symbolically against the US dollar around China’s National Day holiday at the start of October, before reaching 7.4 per US dollar in mid to late November.
The onshore yuan closed at 7.2835 per US dollar on Tuesday, the strongest since September 4.
“To be honest, [a weak yuan] is probably a net positive,” said Louise Loo, lead economist at Oxford Economics in Singapore. “It would make exports more competitive.”
Exports to most of China’s major trading partners continued to shrink in August, though the declines narrowed from July. Shipments to the United States dropped for the 13th consecutive month after falling by 9.53 per cent.
“Chinese exports remain competitive, benefiting from foreign exchange, low Chinese domestic costs, and corporate and bank foreign exchange holdings [are] high,” said Isaac Meng, fixed income portfolio manager for Asia, excluding Japan, with Manulife Investment Management.
The yuan’s valuation effectively raises the prices of China’s imports, and if their US dollar price stays the same, it makes it tougher to travel abroad.
“I’ve already given up on my vacation plans to Singapore over the National Day holiday,” said Zheng Jing, administration director of a Shenzhen-based European company.
“Hotel prices there are already over twice as expensive as they were in 2019. Coupled with the recent exchange rate changes, I found out that a four-day trip would cost about 30,000 yuan (US44,117) for our family of three, far beyond my budget.”
The yuan’s devaluation is hitting mid-range imports, according to Joey Ji, a marketing manager for a US food brand’s branch in China.
“We had a meeting [on Tuesday afternoon] to discuss the supply price of juice with our US supplier since we are already losing money at the current supply price due to the devaluation of the [yuan],” Ji said.
“If [the US supplier] refuses to lower the supply price, we have to raise the retail price.
“But this will surely affect the sales of our brands in the Chinese market.”
The central bank could also raise the reserve requirements for foreign currency to discourage deposits and bolster the yuan, Loo added.
Other options include raising interest rates, implementing capital controls and selling foreign reserves, while the central bank could also tweak the daily reference rate, analysts said. The onshore yuan is allowed to trade up or down within a 2 per cent band.
“Chinese authorities are working through their tool kit of policies to support the [yuan],” ING said on Tuesday.
“It seems unlikely they will allow substantial weakness to come through, and instead will be hoping that their actions can buy them some time until the broad dollar trend turns lower.”
But China’s push over the past decade to use the yuan for currency settlements in other countries may pay off while the exchange rate is weak.
Malaysian fruit exporter DKing is settling transactions with Chinese buyers in yuan and ringgit.
“We accept [yuan] when we trade with China,” said DKing founder Simon Chin.
“If you use US dollars, we have to change another time and it’s not advantageous to the buyer. Our buyers will be happy because they don’t have to rely on foreign exchange.”