The U.S. dollar index continued to strengthen, and the RMB exchange rate against the U.S. dollar fell in both the onshore and offshore markets. On August 15, the exchange rates of onshore and offshore RMB against the US dollar continued to fall, and the offshore RMB once fell below the 7.31 mark, continuing to hit a new low since early November 2022.
RMB depreciation is beneficial to corporate exports
The RMB has devalued again! In fact, it is not necessarily a bad thing for the textile industry. A moderate depreciation of the RMB will help improve the international competitiveness of the textile and garment industry, help enterprises settle foreign exchange, and help stabilize growth, employment and exports. When the RMB depreciates, the prices of goods priced in US dollars will fall, which is equivalent to external discounts. Sudden discounts often arouse consumers’ desire to buy, so they are beneficial to foreign trade export companies.
At the same time, export companies all settle their accounts in U.S. dollars, that is, the payment received is in U.S. dollars and must be converted into RMB, which is what we usually call foreign exchange settlement in the industry. For example, the exchange rate at the beginning of August was 7.15, and now it is 7.3. A payment of US$1 million can be exchanged for an additional 150,000 US dollars. And this extra money depends purely on the exchange rate. To put it bluntly, it is equivalent to getting it for nothing.
Exchange rate fluctuations affect corporate profits
Although the depreciation of the RMB is beneficial to foreign trade export companies, the instability of ups and downs is not necessarily a good thing, so that it is difficult for companies to grasp the best exchange rate, and they will still have gains and losses in the end. For textile workers, the rise in the US dollar exchange rate has the biggest impact on tax rebates on export orders. In fact, to put it bluntly, everyone in the industry knows that the tax refund part is pure profit. Especially when customers have severely reduced prices this year, the tax refund part may be the entire profit. When declaring a tax refund, the declaration is based on the exchange rate on the day of declaration. For example, an export enterprise declares a tax refund of 1 million U.S. dollars. Due to large exchange rate fluctuations, the exchange rate on the day of tax refund may be 7.15 yuan/USD, or it may be 7.3 yuan/USD. Therefore, , export enterprises may receive an additional tax refund of US$150,000, or may receive a lower tax refund of US$150,000.
RMB depreciation is not conducive to repayment
In addition, when the RMB depreciates and the exchange rate fluctuates greatly, export companies often want to seize the best settlement point, so there will be a waiting period. However, failure to settle foreign exchange will lead to difficulties in capital flow, and payment to suppliers will be in arrears. According to the owner of a weaving factory: “When the exchange rate fluctuates greatly, it is difficult for us to collect payment. The export companies we cooperate with will not pay immediately. They are waiting for a suitable settlement point, which delays it for almost another week. ”
For orders received by foreign trade companies, although the price has already been set when the contract is signed, no changes can be made to the price. However, since the depreciation of the RMB is good for exports, foreign customers who have placed orders expect that the U.S. dollar will continue to appreciate, so they will prolong the bill period and fail to pay in time. Then foreign trade companies will not only not be able to get the dividends from the depreciation of the RMB and exchange settlement, but they will also be unable to get payment for goods on time.
So how will the exchange rate go in the future? How can export companies obtain maximum benefits? The industry believes that it is currently at a critical point in the long-short game. The US dollar has risen for five consecutive weeks and has entered a key pressure point. Further attention will be paid to the Federal Reserve’s interest rate hike. At present, the probability of the United States raising interest rates again is actually not high unless some major changes in data occur.
On August 1, the People’s Bank of China and the State Administration of Foreign Exchange held a work conference for the second half of 2023. In terms of “strengthening and improving the supply of foreign exchange policies and maintaining the stable operation of the foreign exchange market,” the meeting proposed to pay close attention to cross-border capital fluctuations, strengthen macro-prudential management and anticipatory guidance, and keep the RMB exchange rate basically stable at a reasonable and balanced level.
Whether from the perspective of the international situation or domestic policies, it is unlikely that the RMB will continue to fall. It is normal for the current exchange rate to fluctuate in a range, and it is also a necessary stage before reaching the turning point.
And you? Is the exchange rate bullish or bearish? Leave a message and tell us!
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