Eurozone crisis creates a silver lining for US SME importers
Wednesday, 1 December 2010
Diane Wang
Currently, the Chinese currency -- RMB -- is informally 'pegged' to the US dollar at a rate of about 6.8 and this undervaluation was arguably causing trade imbalances between the US and China. The argument goes something like this: while it was good for US importers and Chinese exporters to have the RMB at an artificially low level, at the same time it made products imported from the US into China artificially high thereby hurting US companies.
In the past few months it was thought that there was a consensus amongst Chinese policy-makers that the peg would be broken and the Chinese RMB would be allowed to gradually rise about 3.0-5.0 thereby cushioning the impact on the Chinese export sector. This, of course, was on the basis that the world economy was steadily recovering from the financial crisis and there were no other major financial crises in the world.
Well what a difference a couple of months makes!
The dramatic European debt crisis as a result of the Greek bailout and the plunging value of the Euro has meant that any plans for a slight rise in the RMB as against the US dollar are now on hold…again. The crisis in Ireland has further exacerbated the problem.
The Euro has plunged to its lowest level against the RMB in almost a decade. Its future also is not certain. The slump of Euro has prompted Chinese authorities to publically warn that China's exports to Europe are threatened. Indeed, there are a number of anecdotal reports from clients of my company that European importers are cancelling or significantly reducing product orders. This appears to be by virtue of an inability of European companies to obtain normal trade finance because of the severity of the debt crisis together with heavily reduced purchasing power of the Euro.
A number of Chinese domestic economic issues also cloud the picture. The Chinese Stock Exchange has fallen sharply in recent times. This is mainly due to the Chinese government's attempt to restrict the availability of credit in order to prevent the real estate property bubble from bursting.
All of these factors mean that there will be no short-term revaluation of the RMB as against the US dollar. The US Government has recently stated that it intends to press China on other trade issues like market access for US companies and increasing the value of US exports to China. The US has announced that it wants to double US exports to China over the next decade.
What does all this mean for US small and medium enterprise (SME) importers of Chinese products? I believe that the situation presents great opportunities as the prices of Chinese products available for export will remain low for the foreseeable future and there appears now to be no likelihood of major costs increases as a result of exchange rate issues. Under such circumstances, there is now a lot of opportunity to lock in these prices for the future.
More importantly, because of the problems in the European import market, many Chinese suppliers and manufacturers will now shift their focus to other markets, particularly the US. This means that there is the ability to achieve much lower prices from Chinese exporters because of the excess product available. It maybe that there has never been a better time for US SME companies to commence or increase sourcing products from China.
Currently, the Chinese currency -- RMB -- is informally 'pegged' to the US dollar at a rate of about 6.8 and this undervaluation was arguably causing trade imbalances between the US and China. The argument goes something like this: while it was good for US importers and Chinese exporters to have the RMB at an artificially low level, at the same time it made products imported from the US into China artificially high thereby hurting US companies.
In the past few months it was thought that there was a consensus amongst Chinese policy-makers that the peg would be broken and the Chinese RMB would be allowed to gradually rise about 3.0-5.0 thereby cushioning the impact on the Chinese export sector. This, of course, was on the basis that the world economy was steadily recovering from the financial crisis and there were no other major financial crises in the world.
Well what a difference a couple of months makes!
The dramatic European debt crisis as a result of the Greek bailout and the plunging value of the Euro has meant that any plans for a slight rise in the RMB as against the US dollar are now on hold…again. The crisis in Ireland has further exacerbated the problem.
The Euro has plunged to its lowest level against the RMB in almost a decade. Its future also is not certain. The slump of Euro has prompted Chinese authorities to publically warn that China's exports to Europe are threatened. Indeed, there are a number of anecdotal reports from clients of my company that European importers are cancelling or significantly reducing product orders. This appears to be by virtue of an inability of European companies to obtain normal trade finance because of the severity of the debt crisis together with heavily reduced purchasing power of the Euro.
A number of Chinese domestic economic issues also cloud the picture. The Chinese Stock Exchange has fallen sharply in recent times. This is mainly due to the Chinese government's attempt to restrict the availability of credit in order to prevent the real estate property bubble from bursting.
All of these factors mean that there will be no short-term revaluation of the RMB as against the US dollar. The US Government has recently stated that it intends to press China on other trade issues like market access for US companies and increasing the value of US exports to China. The US has announced that it wants to double US exports to China over the next decade.
What does all this mean for US small and medium enterprise (SME) importers of Chinese products? I believe that the situation presents great opportunities as the prices of Chinese products available for export will remain low for the foreseeable future and there appears now to be no likelihood of major costs increases as a result of exchange rate issues. Under such circumstances, there is now a lot of opportunity to lock in these prices for the future.
More importantly, because of the problems in the European import market, many Chinese suppliers and manufacturers will now shift their focus to other markets, particularly the US. This means that there is the ability to achieve much lower prices from Chinese exporters because of the excess product available. It maybe that there has never been a better time for US SME companies to commence or increase sourcing products from China.