The RMB Exchange Rate Hit A Two-Year Low

Recently, the RMB has continued to depreciate and is close to breaking 7 against U.S. dollar, what impact does this have on China's manufacturing sector? Is there any benefit or drawback for foreign buyers?

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The continued advance in the U.S. dollar index has pressured non-U.S. currency exchange rates. The onshore and offshore RMB has weakened against the USD, hitting a new low since August 2020.

According to the China Foreign Exchange Trade Center (CFEC), on September 5, 2022, the mid-rate of the RMB against the USD in the interbank foreign exchange market was 6.8998 yuan, down 81 basis points from the previous value.

1. What is the impact of RMB devaluation on textile companies?

A Chinese textile leader recently said that the devaluation of the RMB is beneficial to the company’s exports. A textile enterprise in Jiangsu also said that textile companies are paying close attention to changes in the international market environment and exchange rate changes, the RMB moderate depreciation is conducive to the company’s foreign trade export business.

From a short-term perspective, the exchange rate fluctuations on foreign trade enterprises have brought some good, some foreign trade people also quickly on the lock exchange and pricing adjustment to respond to the severe foreign trade situation, in order to enhance their competitiveness.

2. Exchange rate fluctuations have become the “normalized” challenges faced by enterprises

A foreign trade expert in the textile industry said that the recent depreciation of the RMB against the US dollar has an overall impact on the production and operation of the textile industry in three areas: 1. For enterprises with a high proportion of export sales, while having more US dollar assets will benefit; 2. Enterprises whose upstream raw material purchases are not entirely in the country and are highly dependent on imported raw materials such as imported cotton, cotton yarn, equipment, etc., will be negatively affected; 3. For enterprises with foreign debt in US dollars or forward exchange settlement, it will have an impact on the expected earnings of enterprises. For some large enterprises, these three situations coexist, and the degree of impact varies for specific enterprises.

3. Pros and cons of RMB depreciation

Due to the devaluation of the RMB, the purchasing power of foreign consumers for Chinese products will increase significantly. For China’s exporters, it may mean receiving more orders, and even if the number of orders received is the same as in previous years, the business income will be enhanced. This is one of the main reasons why China’s textile export data this year is still performing well. Of course, the devaluation of the RMB has both advantages and disadvantages. For imported goods, it will cost more. Therefore, we are able to see that the number of imported cotton and cotton yarn has decreased in recent times, and part of the reason is due to the devaluation of the RMB causing the cost to rise.

RMB devaluation has a positive boost to exports, but its impact should not be overestimated. As most enterprises have previously adopted a series of means to hedge exchange rate risks, such as import hedging, dollar financing and forward foreign exchange transactions, the degree of positive impact on performance should be analyzed on a case-by-case basis. Textile enterprises should pay close attention to changes in the international market environment and exchange rate movements, with a view to gaining more revenue, through the reasonable optimization of foreign currency assets and liabilities structure, to improve foreign exchange risk resistance.

However, the devaluation of the local currency is beneficial to exports, but export spinning enterprises still hope that the exchange rate fluctuations are in a stable range. The impact of RMB exchange rate fluctuation on export textile enterprises is mainly reflected in two aspects, one is the settlement of foreign exchange, the other is the price of raw materials. The settlement, generally speaking, the lower the exchange rate, the more favorable exports. However, if the exchange rate decreases, overseas orders will also be suppressed, and the collection time is uncertain if the spot exchange rate fluctuates again when collecting the exchange rate, but there is more risk of loss than gain. Raw material prices, the lower RMB exchange rate, unfavorable to imports, resulting in the production of cotton, chemical fiber and other raw materials used in the import price increases, will pull the export of textile enterprises’ production costs rise.

4. RMB exchange rate will continue to oscillate in the future

Although the current global economic and monetary policy situation is becoming more complex, experts generally say that the RMB is still resilient.

The rise and fall of the exchange rate is a double-edged sword for the foreign trade industry. A moderate depreciation of the RMB exchange rate back is conducive to enhancing the competitiveness of export trade and price advantage and promoting the recovery of the real economy, but the import cost of import enterprises will increase. In the short term, the US dollar index continues to strengthen and the RMB exchange rate may come under pressure. In the medium to long term, the real exchange rate of RMB has strong resilience and the possibility of a significant decline is not great. Because in the long run, the RMB exchange rate is still supported by economic fundamentals, after the economic growth rate stabilizes and rebounds, the RMB may show some stabilization trend. Now both the government and the market are much more tolerant and adaptable to two-way fluctuations and wide oscillations in the exchange rate.

According to the chief economist of CITIC Securities, the balance of payments is in balance in 2022, and the RMB will probably remain in an oscillating trend.

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