The Chinese Yuan has strengthened nearly 25% against the British Pound since the beginning of 2008. For those traders buying in pounds, or to a lesser, yet still significant effect, in Euros, profit is being eroded or wiped out completely.
Is the trend of a strengthening Yuan likely to change in the near future. Yes……. but not significantly.
I expect to see the Yuan level at around 12.00 to the pound this week, however that is still a 20% drop on earlier this year……… I also then expect the Yuan….. over the course of the next year to strengthen by around 3%.
This is not necessarily as catastrophic as one might imagine. As the Yuan strengthens against the Pound and particularly the Euro, the cost of Chinese capital asset purchases from Europe will come down. Externally purchased raw materials, many of which also come from Europe, will come down. As the ‘value added’ in China is mainly labour of which this may only represent between 10% and 30% of the finished goods price the net effect of currency fluctuations may not be quite so dramatic.
It does of course take time for these anomalies to balance. Raw material purchases are often made well in advance of the eventual sale and there will not be any purchase gains made by Chinese companies on sales made today. However it is important that when negotiating your next order or contract that you factor in the likely savings to be made in China and pursue reductions accordingly.
The Chinese will not volunteer this information and will be happy to sit back and take the extra profit when it comes……. and why shouldn’t they?……… I would.
One final thing to consider is that China exports more goods to the USA than anywhere else in the world but its US imports are tiny by comparison. The Yuan, whilst not officially pegged to the US Dollar, follows it closely. It suits the US to have China buying its machines and raw materials more cheaply from Europe thus allowing China to sell its goods more cheaply to the US whilst still being politically expedient at home in not allowing the Dollar to strengthen appreciably against the Yuan.
Whilst ever China and the US are satisfied with the situation it is unlikely to change and as such I cannot see the exchange rates altering significantly any time soon.
Interesting perspective. Great post.