Businesses working with China trade for importing goods often have to pay for their goods or labor to make many of their completed products for the US market. Lets face it, the US dollar does not go the same distance it used to in China or anywhere else for that matter.
Unfortunately, the US does not make a lot of toasters or microwaves anymore so retailers and consumers are forced to buy Chinese made goods. US businesses often use trade financing to import goods. We could buy Made in the USA products, but it is ultimately the consumer’s decision for the most part when they walk into Walmart and choose to buy the less expensive Chinese made product.
Businesses are all in a wait and see mode as the Chinese currency has appreciated drastically over the last several years by more than 30%; however, the Chinese economy looks like it may be finding its equilibrium as the economy matures. The last couple of years of growth in China’s GDP have shown a dip in their GDP. Their GDP in the last two years been between 7-8% which are the lowest levels in 15 years. These figures are probably a couple percent too high as well do to adjustments that should be taken internally before China reports. India was also thought to be a industrial machine and it has shown the same decline over the last several years.
The People’s Bank of China (“PBOC”) has also taken measures to slow currency speculation by widening the Yuan currency fluctuation bank to a 2% band. The PBOC as reported by the Wall Street Journal today stated, “The Central Bank of China is pretty satisfied with the efforts [using this new widened band] to punish speculators”. “Over the last 5 years, PMF Bancorp’s clients importing and trade financing goods based on factoring invoices from China have seen a dramatic increase in cost of goods and labor in China, but it appears to be leveling off in the last year” states Mr. Stephen Perl, CEO of 1st PMF Bancorp.
Therefore, is China becoming more expensive or less expensive for US importers can be debated but it should be clear now that the currency will probably find an equilibrium around this current level and there should not be anymore large jumps in appreciation. On the contrary, if the Chinese people, businesses, etc. become worried enough about their economy then we will start to see a flight of capital which would depreciate the currency even further and would help make doing business in China cheaper again. So, I think all parties have a vested interest in keeping the China Yuan stable at these levels.
Stephen Perl, MS, MBA
CEO of 1st PMF Bancorp
Thxs
SP
Author of Book: Dancing with the Dragon: the Secrets of Doing Business with China (Book 2012)
