For Sale In China Blog

The Chinese Yuan has strengthened against almost every Worldwide currency over the last 12 Months. Much of this increase is tied to the strengthening of the US Dollar and the fact that the RMB is loosely linked to it, but also the increase is due to the past and expected future growth of the Chinese economy.

There have been huge inflows of investment and cash into China and its economy over the last year to such an extent that the government had to put in place almost emergency measures to curb and control this inflow. Well the tide has now turned whilst no-one would describe the situation as an exodus there most certainly is an air of apprehension over current investments which I feel is likely to escalate.

Over recent years the Chinese have not suffered any loss of confidence in their economy and with double digit growth everyone has enjoyed a fairly profitable period. However, what will be interesting is how the Chinese react to the current situation, to reduced growth , massive redundancies and a general weakening of previously strong indicators. Chinese are very superstitious and extremely susceptible to emotion and as soon as they began to experience a drop in confidence we may see a run like nothing we have experienced in the West. We may well see an exodus.

My money is on a weakening Yuan over the next 12 months.

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.