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RMB’s exchange rate more flexible. Your risk just doubled. What to do?

The China Daily runs the headline “Yuan’s trading reform gains momentum, risk prevention needed.”

Expanding the yuan’s floating band is a significant step of the yuan’s trading reform, but will also increase trading risks for export-oriented firms and banks in the short run, said Lian Ping, chief economist with Bank of Communications.

The exchange rate of the Chinese Yuan or RMB against the USA has been tightly regulated by Beijing to a band of just ½ of a percent.  Meaning it could only go up or down so much in a day’s trading. But recently that bandwidth has been doubled to 1%.  It doesn’t sound like much, but if you are placing a PO to China in USD, your supplier is factoring their exchange rate risk into the price of the goods sold.

According to our research, suppliers have been building in about 5% of the cost of goods sold for their exchange rate risk.  But now that the daily band has doubled, we can expect them to build in about 10% for the exchange rate risk.

 

What can be done?

Consider paying in RMB.  Below are some articles on this topic for your reference.

 

Are we on the level?

The article states:

Speculative capital inflows are also expected to ease, as the value of the yuan, which has
gained over 30 percent against the U.S. dollar since 2005, is widely believed to have approached an “equilibrium” level.

Since China has a policy of keeping the RMB stable in order to bolster international trade, I am hoping that Beijing’s extension of the daily trading band is an indication that they believe the current
RMB-USD exchange rate will stabilize around the current exchange rate of about 6.3 RMB to 1 USD.  This would be good news for us buyers, because not only does stability make it easier to trade, but every time the RMB gets stronger, our cost of doing business goes up.

So let’s keep our fingers crossed that 6.3 is the new 8.26!

8.26 was the pegged rate that was in place for many years before the RMB started to float. Those were the glory days ofChina sourcing.

 

Related Content:

RMB: The Best Currency for China Trade

Pay suppliers in RMB and save big

My appreciation of the RMB depreciation!

 

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)

 



Mike Bellamy

Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center (www.ChinaSourcingInfo.org). Author of “The Essential Reference Guide to China Sourcing” and founder of PassageMaker Sourcing Solutions. Mike is co-founder of CSA, the China Sourcing Academy.


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