Exporters Shutting Down Early Amid Nightmare Yuan Rally

The dollar is starting to cause real pain in the Chinese economy.

"Exchange rate changes from day to day, did not dare offer a quote, did not dare take a single order, many workers are quitting, might as well close early for the holiday." Peng Bo said.

iFeng: 人民币创30月新高外贸企业人去楼空 接单不接单都是死

One new yuan high after another, for enterprises that have not yet settled in USD foreign exchange, and those preparing to ship goods overseas, it's like a nightmare. "After Spting Festival, again discuss risk sharing with customers. If things continue of this way, both taking orders and not taking orders are dead ends." Peng Bo said.

Early holiday

Tongxiang, Zhejiang Province, famous for woolen products, intensive factories, many have closed doors.

"What to do, you know how much money I lose from every single order?" Peng Bo asked. When the exchange rate was 6.8 take orders, at settlement it is 6.5, settlement loss of tens of thousands of yuan, such scenes continue to occur in 2017, a large number of dollars lying in the account, afraid to settle, only watched the exchange rate From 6.5 all the way to 6.2.

Intense competition in the foreign trade market, many foreign trade enterprises profit is 3 to 5 percents, high value-added businesses can not help but shrink the profits, not to mention where Peng Bo's textile industry.

Take an order, risk a loss; not taking orders is a dead end, in the context of the strong growth of foreign trade, small and medium foreign trade enterprises have plunged into an unprecedented confusion.

It's not only small firms running into trouble. Electronics manufacturer Guangdong Goworld (000823) is a 4.5 billion yuan market cap company.

On the evening of February 1, Guangdong Goworld released the voluntary information disclosure announcement on the Company's exchange loss in January 2018: Since the beginning of 2018, due to the continued decline of the U.S. dollar and the relative appreciation of the Renminbi, it is expected that in January 2018, the Company and its subsidiaries ss a result of RMB appreciation, the exchange loss is about RMB45 million.

For those keeping score, Guangdong Goworld suffered a loss equivalent to 1 percent of its market capitalization in January alone, solely due to changes in the exchange rate. That's about 20 percent of its profits in 2017, based on a current P/E of 23.

Two-third of exporters will reduce business/expect a slowdown should the yuan rally 3 percent back to its old high:

Looking back on January, the RMB exchange rate has risen by nearly 3.5%, which is more than half of the 6.72% increase for the full year last year and the largest one-month gain since the exchange rate was merged in 1994. A survey of Chinese exporters shows that over 60% of exporters believe that a 2% or more appreciation of the renminbi against the U.S. dollar will have a negative impact on its exports. 8% of respondents also point out that a stronger renminbi will seriously affect their exports business. More than one-third of surveyed companies said their exports will start to decrease if the renminbi appreciates by 2% or more, while 32% of respondents said a 3% appreciation would cause a decline in exports.

Exporters are hoping and praying for a reversal, but they may be exacerbating the uptrend in the yuan because many delayed exchanging USD for CNY. With Spring Festival approaching, many have liquidity needs:

According to Li Liuyang, chief foreign exchange analyst at China Merchants Bank, there is still a chance of the exchange rate rising because of the demand for foreign exchange settlement. During the current round of RMB appreciation, shorts are not effectively cleared and the renminbi still has a strong probability of rising. In the past 4 months, due to the rapid appreciation of the renminbi, the export enterprises caught off guard and brought the phenomenon of "reluctant dollar sales." Exporters want to wait for better settlement points, but close the year, companies generally need funds, which exacerbated the recent market panic.

..."If companies do not hedge, they will suffer miserably, not because of the magnitude of the appreciation, but because the appreciation is too fast," the trader said. It is understood that after the rise of 6.30, the customer's settlement stop loss significantly increased, the rhythm of settlement also significantly accelerated.

China is also getting squeezed as mid- and low-cost manufacture leaves China, but developed nations move to keep more high-end manufacturing in their countries (or factors such as automation and cheap energy in the U.S. make domestic production more attractive):

"Earlier, we relied on the low factor cost to seize the opportunities of global industrial transfer and depend on the internal and external forces to hold the position of China's trading nation, but the 19th Congress also proposed to build a trading power. The internal environment for the development of China's foreign trade, Conditions have undergone profound changes. Developed countries have returned to the industry and returned to manufacturing. We are now in a slowdown in undertaking the global industrial transfer. At the same time, the outward transfer of our middle and low end is accelerating again. Therefore, Called double extrusion .If you continue to use the past, it is obviously unsustainable. "Deputy Secretary for Foreign Trade, Department of Commerce, said Lu Suixun.

According to Guan Tao, a senior fellow at the 40th China Financial Forum, after the RMB is added to the SDR, the process of marketization of the RMB exchange rate is accelerating. The exchange rate of RMB to clean and float is the trend of the times. Domestic enterprises should seize the time and gradually cultivate and improve their adaptability to exchange rate fluctuations Ability, establish a correct awareness of financial risks, focus on the main industry, manage the risk of currency exposure.

However, foreign trade enterprises, the first need to survive this exchange rate pressure. In the short term RMB settlement can not be widely populated in the context of how to use the hedge, has become a common problem for many businesses.

Finally, expect central bank intervention if the yuan approaches its 2014 high of USDCNY 6.05:

Peking University Guanghua School of Management professor color indicates the current exchange rate of RMB against a basket of currencies did not show unilateral remain volatile, although rapid appreciation against the US dollar, but the euro and the British pound and other currencies has depreciated relative terms as a whole is still on It is stable. However, the RMB against the US dollar has broken through 6.3, taking into account the import and export and other factors, on this basis, if the RMB against the US unilateral reassert appreciation, breaking height of 8.11 before the reform, the central bank will conduct certain high probability intervention. Specific interventions might include measures to cancel the pre-stringent regulatory capital flows, as well as counter-regulatory factor in the central parity pricing mechanism Shangni cycle, and may also include the restart process of RMB internationalization.

The yuan is tracking the euro since its "surprise" devaluation in August 2015 and CNYUSD rose less than EURUSD over the past year.

At USDCNY 6.9 China is worried about capital outflows and an "uncontrolled" depreciation in the renminbi. When USDCNY hits 6.3, small and medium exporters are "plunged into an unprecedented confusion." From the midpoint of this range, USDCNY 6.6, the yuan can only fluctuate about 5 percent. Expand the bottom of the range to USDCNY 6.0 and it's still a total range of only 7.5 percent in either direction, outside of which warrants central bank intervention. In other words, normal currency market volatility is a problem for China. And if its a problem for China, it's a problem for everyone.

Related: Cash, Dollar Crunch Returns: Bankers Begging Friends for Deposits on WeChat.