RMB exchange rate fluctuations have increased How can foreign trade enterprises achieve a calm response?

How can foreign trade enterprises respond calmly to increased RMB exchange rate fluctuations?

On May 22nd, data from the China Foreign Exchange Trading System showed that the closing price of the onshore yuan against the US dollar was 7.0304 yuan at 16:30, a decrease of 69 basis points from the previous trading day. Since breaking the “7” mark in the middle of trading on May 17th, the onshore yuan against the US dollar has fallen by more than 0.9% in just a few trading days.

Currently, with the renminbi exchange rate showing a two-way fluctuation pattern, market sentiment is stable. The downward adjustment of the renminbi exchange rate will bring certain benefits to export companies in the short term. The renminbi exchange rate is expected to remain stable, and foreign exchange market transactions remain rational. In the long run, maintaining a long-term and stable exchange rate is more conducive to corporate development.

Short-term benefits for export companies

The downward adjustment of the renminbi exchange rate brings certain benefits to export companies.

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On the Shenzhen Stock Exchange Interactive Platform, Tiandishangmao stated that the products the company exports to the North American market are all settled in US dollars, and the downward adjustment of the renminbi exchange rate is beneficial to increasing the company’s exchange income. Zhejiang Zhengte stated that the current downward adjustment of the renminbi exchange rate has a positive impact on the company’s export business.

“At present, our company’s orders are scheduled until June, and new orders are still increasing.” Talking about export orders, Liu Mingyang, general manager of Yiwu Ouchi Import and Export Co., Ltd. in Zhejiang Province, can hardly hide his excitement.

Export orders are more “valuable.” It is estimated that on April 28th, the closing price of the onshore yuan against the US dollar was 6.91. If a foreign trade company received an export order of $1 million at the end of April and settled the exchange on May 22nd under the premise of being priced in US dollars and the trading price remaining unchanged, compared with the estimated profit at the time of signing the order, they could earn about 90,000 yuan in profit.

Experts believe that although the downward adjustment of the renminbi exchange rate is advantageous to export companies, large trading companies often lock in exchange rates in advance to reduce risks brought by market fluctuations, so the impact is not significant. For small and medium-sized enterprises, their trade scale is small, and it is not advisable to hedge against risks, making them vulnerable to exchange rate fluctuations. Therefore, the benefits brought by the downward adjustment of the renminbi exchange rate are limited. For traders, maintaining a relatively stable exchange rate can bring long-term benefits.

Jointly Addressing Exchange Rate Fluctuations

In response to exchange rate fluctuations, some foreign trade enterprises adopt foreign exchange hedging measures to reduce exchange rate risks. Zhejiang Zhengte states that the company has taken necessary foreign exchange management measures such as forward foreign exchange contracts and other financial instruments to moderately reduce the risk of US dollar exchange rate fluctuations. Pnergy Technology states that in order to effectively control and prevent the adverse impact of large exchange rate fluctuations on the company’s operations, the company will timely adopt foreign exchange hedging measures to control exchange rate risks.

Some foreign trade enterprises directly use RMB settlement. Zheng Leijun, the person in charge of the operation and development of Cixi Wanyang Zhongchuang City Development Co., Ltd. in Zhejiang Province, stated that in response to exchange rate fluctuation risks, many local foreign trade enterprises directly settle in RMB when accepting orders, without considering exchange rate conversion.

“At present, the number of enterprises using financial derivative products to avoid exchange rate risks is not many, because it comes with a certain cost, which is a burden for low-profit labor-intensive industries. With the transformation and upgrading of China’s industrial structure and the continuous acceleration of RMB internationalization, the impact of exchange rate fluctuations on Chinese enterprises will gradually decrease.” said Lian Ping, chief economist and dean of the research institute of Zhixin Investment.

To curb large fluctuations in exchange rate, policies have released positive signals. The first meeting of the China Foreign Exchange Market Guidance Committee (CFXC) in 2023 held on May 18 stated that in the next stage, the People’s Bank of China and the State Administration of Foreign Exchange will strengthen expectation guidance and correct pro-cyclical and unilateral behavior when necessary to curb speculative activities. Member units of the self-regulatory mechanism should consciously maintain the basic stability of the foreign exchange market, resolutely curb large fluctuations in exchange rates, actively implement self-discipline norms, study and strengthen self-regulatory management such as strengthening US dollar deposit business, improve the level of exchange rate hedging services for enterprises, reduce the exchange rate hedging costs of small and medium-sized enterprises, and better serve the real economy.

Rationality Remains in Forex Trading

Against the backdrop of exchange rate fluctuations, forex traders have felt a significant change in the willingness of exporters to settle foreign exchange transactions. “Previously, the renminbi exchange rate showed an upward trend, and the high deposit interest rate of the US dollar caused companies to increase their wait-and-see attitude. Many companies were unwilling to quickly liquidate their US dollar deposits,” said a forex trader at a joint-stock bank. Recently, the overall balance of settlement and purchase in the market has remained stable, and the short-term exchange rate of the renminbi is expected to range narrowly around the 7 yuan mark, with both selling and buying pressure from the US dollar near this point.

Wind data shows that in the first quarter, the onshore renminbi against the US dollar has risen cumulatively by 1.15%. As of 3 pm on May 22, since the second quarter, the onshore renminbi against the US dollar has fallen cumulatively by 2.22%. “Sell high, buy low” has become the rational trading mode of market entities.

The data on bank settlement and purchase also clearly reflects the change in willingness to settle foreign exchange transactions. Data released by the State Administration of Foreign Exchange on May 15th shows that the settlement rate in April was 72%, up 8 percentage points from the monthly average in the first quarter; the selling rate was 71%, up 3 percentage points from the monthly average in the first quarter, and the surplus of bank settlement and purchase was $5.5 billion. In March, the settlement and purchase showed a small-scale deficit, with banks settling $187.8 billion and selling $203.7 billion.

“In April, the willingness of market entities such as enterprises to settle foreign exchange transactions has increased, indicating that the expectation of the renminbi exchange rate is stable, and the forex market trading remains rational, with supply and demand achieving independent balance,” said Wang Chunying, deputy director of the State Administration of Foreign Exchange and spokesperson.

Looking at the trend of subsequent settlement, Wang Qing, chief macro analyst at Orient Securities, believes that the current US dollar deposit interest rate in China has entered the top range, and the probability of further increase is small. With the continuous recovery of the domestic economy, the overall trend is that various market interest rates, including the renminbi deposit rate, will rise. “It is difficult for the low settlement rate and the relatively high selling rate to continue.” Wang Qing said.

Source: Zhejiang Trade Promotion

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