The continuous revaluation of the yuan has been bad for Zhu and
her family because it has been shrinking their dollar assets.
The family runs an auto part import business, and converted some
of its assets into dollar account during the 1997-98 Asian
financial crisis, when the yuan was considered unsafe.
China depegged its currency from the greenback in July 2005,
revaluing it by 2.1 percent. That triggered a process that has been
eating into Zhu's assets ever since.
Last year, the yuan rose almost 7 percent against the dollar,
making the overall revaluation about 14 percent since July
2005.
And yesterday, the central parity rate of the yuan hit a new
post-depegging high of 7.2454 against the dollar.
"I am very upset and don't know how to handle my dollar assets,"
said 27-year-old Zhu. "Should I dump my dollars or just wait for it
to rebounce?"
Financial experts would suggest she sell it. The market
sentiment, too, indicates the yuan may rise another 8-10 percent
against the dollar by the end of this year.
Salaried people paid in dollars have not been spared either.
"I'm paid in dollars every month. I remit the money back to China
after converting it into yuan," said a Ministry of Foreign Affairs
staff based abroad.
Some domestic companies with overseas projects are aware of the
loss their staff are suffering, though, and have taken steps to
compensate them. They have begun paying their overseas workers in
dollars for a fixed term, after which they review the
situation.
Every coin has two sides, however. People traveling abroad spend
much less now. Young people eager to study abroad would save money,
too, for they have to pay less in yuan.
Also, Chinese investors would feel happy because they have to
spend less money on the same overseas projects.
Some people back home stand to gain too because of the rising
yuan. Car buyers, for example, can get an imported vehicle at a
lower price.
But a rising yuan is a nightmare for Chinese exporters,
especially the smaller ones. Tens of thousands of small- and
medium-sized exporters face closure because of the rising yuan and
scrapped or reduced export tax rebates.
"The yuan revaluation has had a great impact on our exports,"
said Wang Fu, general manager of Shenzhen Jiayinking Electronics,
which exports hi-fi systems to Japan, Europe and Africa. "I know
many domestic enterprises making and exporting goods have
collapsed."
"Rising labor and material costs, coupled with the rising yuan,
has shrunk our profit," complained Wang, whose company employs
about 200 people.
Jiayinking tries to cut its operational costs and raise prices
when it gets enough orders to make up for the falling profit. That,
however, is risky business, says Wang, because clients can shift to
other companies.
In a developed economy, companies can resort to financial
derivatives, such as currency swaps and foreign exchange futures,
to hedge against potential foreign exchange losses. But they seem a
remote possibility at home given China's young financial market and
lack of awareness among domestic enterprises.
"It's hard for us to hedge against the risks, though we've seen
a sharp decline in our profit because of the fast rising yuan,"
said Liu, of China National Electric Equipment Corporation. She
refused to give her full name.
Apart from the losses caused by reduced tax rebates, she said,
the company would also suffer because of the dollar-denominated
contract.
In China, financial institutions offer limited number of
services to help enterprises tackle currency risks, and they are
not competent enough to navigate a company through the rapidly
changing market.
"We must first get the approval of insurance companies or banks,
and the procedure is complicated," she said. "We seldom use them
(financial derivatives) to avoid losses."
The smaller firms don't have that easy an access to such
financial tools to manage their foreign exchange risks, said Dong
Yuping, a senior economist with the Institute of Finance and
Banking, affiliated to the Chinese Academy of Social Sciences.
"They would be suffering the most (because of the rising
yuan)."
(China Daily January 16, 2008)
