The China Daily ran an interesting article about how more and more UK retailers are paying their Chinese suppliers in RMB (Chinese Yuan or CNY) rather than USD or Euros.
With the yuan having appreciated at least 7 percent against the dollar since June 2010, Chinese suppliers commonly embed a “buffer” into dollar-denominated contracts to guard against further yuan appreciation.
How much can be saved if this buffer is removed by settling in RMB rather than USD?
According to Barclays Capital, the investment banking division of Barclays PLC, more British retailers are paying in yuan to achieve cost savings of up to 8 percent.
What’s the downside for buyers?
- Settling in RMB removes the risk for the seller but transfers the risk to the buyer as the buyer is holding RMB in their account. Say for example, your order takes 3 months to produce and you agree to pay in RMB. If the exchange rate changes during this time, the risk is on the buy side. Luckily, the RMB’s exchange rate is tightly controlled by Beijing and we haven’t seen any major short term fluctuations.
- The other problem is that you can’t walk into your local main street USA bank and open up a RMB account. At the time of writing, I believe only banks in Hong Kong and recently London are offering businesses the option to open RMB accounts. More cities will come on line in future, but at present, most buyers can’t deal in RMB even if they wanted to. But this is going to change fast, so get ready to deal in RMB and take advantage of the savings.
Wishing you successful China sourcing!
About the blogger
Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center (www.ChinaSourcingInfo.org). He is also the author of, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book) and founder of PassageMaker Sourcing Solutions (www.PSSchina.com)