Guest Post by Patrick Gibson
The newly effected direct exchange capability between the Yuan and the AUD will soon start helping cut costs for thousands of exporters of goods and services in Australia, because trade between the two countries will be free of the fluctuations of the USD.
At the same time, the Chinese Yuan has been appreciating significantly against the AUD and the USD since the beginning of 2013. The nominal trade-weighted Yuan saw a moderate appreciation of 6.1% since the start of the year.
This rise of the Yuan against international currencies is a result of many internal and external factors, including international pressure, and this is mixed news for Australian companies that are sourcing to China their manufacturing and other functions.
Overview of Impact to Australian Outsourcing Companies
Early in April 2013, the RMB/AUD rate was 1/6.48; in other words, 1 AUD was able to buy 6.48 RMB worth of some goods. If the Chinese Yuan appreciates at a year by year rate of 7.5% against the Australian Dollar, it means that within a year 1 AUD will only be able to buy 5.99 Yuan worth of some goods. The Yuan has been steadily rising against international currencies since 2010.
Now a moderate to high appreciation of the Yuan (also known as the Renminbi) by up to 7.5% against the AUD will help to resolve trade imbalances between the two countries. But while that is the good news, the bad news is that the outsourced Australian company will have to raise costs of manufacturing. In addition, there have been other changes in China including rising wages and raw material costs. This is going to raise prices at check-out. But this doesn’t mean the Australian outsourced company in China pulling out, however. Major Australian outsourcing company Myer, for instance, has doubled its outsourcing to China in 2011. They, as well as other outsourced companies are getting around higher costs by moving their manufacturing north, where electricity, resources and labour are significantly cheaper than the south.
There is also the additional fact that the appreciation is likely to become stable at this rate, because of the restrictions that the Chinese Central Bank has still placed on the exchange rate.
Chinese Floating Exchange Rate In Relation to the AUD Explained
Over the past 10 years the Chinese banks have been keeping the value of the currency artificially low through a fixed exchange rate. The undervalued currency was affecting international trade. The fixed exchange rates of the Yuan against the USD (and indirectly the AUD) had given China an unfair trade advantage, with imports to China being expensive and exports becoming cheaper.
The supply of AUD in China was therefore higher but the AUD was weak against the Yuan. In such a scenario, in economies with floating exchange rates, the currency prices adjust themselves to resolve the trade imbalances. That was not the case in China, however, as the currency was fixed with Central Bank intervention to keep the Yuan high against the USD (and indirectly, the AUD). This adversely impacted trading for Australian companies, creating deficits for them and surplus in China.
The switch to a floating exchange rate for the Yuan dependent on market forces since 2010 is a step by the Chinese government towards loosening the Central Bank’s control over the currency. This is going to benefit international traders including Australia. The era of low-priced Chinese goods will soon be over. However this will also mean rising costs for the outsourced company.
Solutions for Australian Outsourced Companies
Clearly the appreciating Yuan against the AUD, rising labour costs, and the new Labour Law requiring at least 150% overtime on weekdays and 200-300% on weekends are affecting the bottom lines of outsourced companies, both for marketers and manufacturers. Some factories have also closed in China, unable to keep up with the changes.
But the good news is that the overall cost of production in China is still lower than anywhere else in the world. Also, despite the Yuan appreciation, calculations suggest that it is still undervalued by around 39%. And given the attitude of the Chinese government, they will not want the value to rise much further.
The outsourced company in China will definitely benefit at this stage by enhancing the quality of products. There will always be buyers for quality goods, no matter the price. A study by Nielsen has shown that while price and value do play a role in determining where people shop and what they buy, manufacturers and retailers who offer high quality and great value do better than those companies and manufacturers that try to stretch their dollars. This is true even in a poor economy.
Guest Post by Patrick Gibson