Wednesday, June 6, 2012

The Tactic Of Paying In RenMinBi Yuan

A Chinese website with a business dimension is noting the rise of Chinese exporters requesting payment in Yuan (most deals with China worldwide are denominated in dollars.)

"We believe that some deals were settled in yuan, which is good for Chinese exporters to avoid exchange-rate risk," Liu said. 

In my book I explain that the importer runs the risk of currency fluctuation, so we make the payment in whatever currency the seller (exporter) names.  Then we manage the risk no with forex contracts, but with the double tactic of frequent minimum order and competing on design, not price.  With this we may find we lose money on one deal in a year due to currency fluctuation, but there are so many transactions in a year that we are safe.  The last time I lost money on one transaction in a year was 1985 when the Yen went squirrely in April and I took a 10% loss on a deal.

The article mentions most trade show deals are denominated in dollars.  With China growing in the last 30 years, a yuan peg to the dollar served China as a constant which assisted in planning.  Here again China used our foolish policies, in this case in the form of having a central bank, against us in a slick jiujitsu move.

This article signals the Chinese are reconsidering the peg, which means exporters will be asking for deals denominated in Yuan.  Back in the 1970s all trade show deals were in yuan (indeed my book shows some such contracts from then) with Hong Kong transhipping and re-invoicing in another currency.

What this means is back to the future, and you already know what to do.  It also means you have an advantage in China, because you will readily say "yes" when the Chinese propose you pay in RMBY.

The article notes the request to be paid in yuan is not well received worldwide.  It is an uphill battle for Chinese exporters.  Your willingness will put you ahead.

You can go further and explain how you manage it.  What you explain will be carried up the food chain, with you cited, which is good for your reputation in China where you are trading.

But there is one more aspect.  This may occasion the return of the letter of credit in payment.  Understand something:  If denominated in Yuan, the Chinese company will get full profits, with no hit from exchange rates. The factory has other orders too, in dollars.  If the orders denominated in dollars, over time, due to currency fluctuations, are decreasing in profitability, then the Chinese will be eager to fulfill those orders first to book the dollars and convert to yuan.  Since they will make full mark on the yuan order, it is better to delay that one, that is to say, your order.

Paying with credit cards, more and more common over the last decade, has no provision to enforcing a shipping deadline.  Letters of credit most certainly do.  So your side tactic is to effect payment by letter of credit, which has harsh shipping deadline requirements.  You are safe from delay.

Feel free to forward this by email to three of your friends.


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