Analysis: Textile Enterprises Respond To Four Changes In Exchange Rate

One way to avoid exchange rate risk: raw material import

The issue of RMB appreciation will become a "big worry" for small and medium-sized export enterprises in the coming period. Is there any way to win in the short term, which will enable them to win enough adjustment time when RMB appreciates?

Three dimensional textile: retreat to processing trade

Nine stellar Technology: start settling funds

"Now, our company has changed back to processing trade."

In July 14, 2010, Ceng Xiang, chairman of the three dimensional digital textile company, told reporters that "because of the appreciation of the renminbi and the rising price of domestic raw materials, the company is trying to avoid using domestic raw materials."

Zeng Xiang was the first to operate in Dongguan.

In recent years, he has had to adjust his strategy frequently.

There are mainly two types of textile export enterprises in China: first, the general export enterprises, which do not earn much money at present, earn a little profit from export tax rebates; two, processing trade enterprises, namely raw materials import, finished products export, and enterprises earn processing fees in the middle.

Mr Tsang said that in the past three years, his textile companies have "changed" in these two export enterprises three times.

Initially, the company adopted the "three to one supplement" processing trade mode.

However, after the outbreak of the financial crisis in 2008, the prices of raw materials such as cotton and cotton yarn dropped sharply, and the export rebate rate of textile and garment increased from 11% to 16%.

"In 2008~2009, the company changed to purchase raw materials from the mainland for export rebates."

Zeng said that although the financial crisis was in the deep valley period, "at that time, the profits of enterprises were 4%~5%".

Unexpectedly, time passed.

The domestic cotton prices in 2010 made the textile enterprises both surprised and puzzled.

In October 2009, the market price of cotton was still 12500 yuan / ton, and cotton price rose to 19500 yuan / ton in July 2010, which rose more than 50%, hitting a new high in the past ten years.

Considering the high price of domestic raw materials, the export tax rebate is far from being able to compensate for the losses of textile enterprises. In addition, the appreciation of RMB is favorable for imports and unfavorable exports.

After pforming into a processing trade enterprise, Zeng's textile company alleviated the pressure brought by the appreciation of RMB.

However, the production cost of export enterprises is still rising.

"Since 2009, the total cost of labor and raw materials has increased by 30%.

The company can not pfer all the cost of the increase to the customers, and must digest part of it. Now the profit of the enterprise is not more than 4%.

Mr Tsang said, "the products exported by the company are settled in US dollars, but we have to pay wages in Renminbi instead of RMB. The appreciation of RMB will indirectly increase the cost."

No doubt, in the appreciation of RMB, the foreign raw material market is relatively cheap, importing raw materials from abroad and developing processing trade is more beneficial to enterprises.

However, the mode of processing trade is not suitable for all export enterprises.

Mo Jintao, general manager of Guangzhou Ao Mei Shi soap industry Co., Ltd., told reporters, "our company was also a" three to one supplement "enterprise before 1998, and later changed from the domestic procurement of raw materials.

It is also very difficult for enterprises to change, because our company needs to buy more raw materials, and there are also many inconveniences in importing raw materials to deal with various tariff issues.

Zeng also understands that pforming into a processing trade enterprise can not solve the fundamental problem of enterprises.

His strategy is: 3D digital textile company independently develops and designs high added value fabrics and garments. After receiving overseas orders, they turn to trading companies to find factories for production.

At present, the high-end orders are completed by the foundry factory in the Pearl River Delta. In the future, Zeng hopes to complete the foundry work by cheaper Southeast Asian countries, so as to reduce costs and increase profits.

His long-term goal is that the enterprise can finally go to the domestic market and successfully create its own clothing brand.

There are two sources of corporate profits: one is to increase sales and two is to reduce costs.

Under the economic downturn and exchange rate fluctuations, it is more difficult for enterprises to increase their exports in the short term, but the space for export enterprises to control costs through capital control is still very large.

Nine Jie Hongbo, chairman of star technology, said in an interview with reporters.

He cited the example of COFCO.

Before 2002, COFCO's funds were decentralized, which caused a problem: each member unit set up their own bank accounts, and applied for bank loans respectively. The funds and accounts of the group were scattered and independent, and the deposits, loans and financial expenses were very high, and the management difficulty was also very great.

Two ways to avoid exchange rate risk: financial instruments

In order to change the financial situation, COFCO has decided to set up a financial company, and COFCO finance has made use of the power of the fund management solution provider to establish a unified centralized fund management system.

With the help of the system, COFCO realized the centralized opening and management of bank accounts. The bank accounts of more than 500 member units were networked with financial companies, and the funds scattered around the banks were collected to the main accounts of financial companies in 7 banks through online banking.

At this point, COFCO financial company can always understand the financial status of the members of the group and adjust the surplus and deficiency within the group so as to make full use of its own funds to reduce bank liabilities and reduce the cost of capital use.

Since 2002, COFCO financial company has directly saved the financial cost of the group by 12 billion yuan, reducing the debt ratio of the group by 5~8 percentage points.

"Enterprises can save part of the cost through the way of capital plan, management authorization, approval, etc., combined with the change of interest rates.

In this case, it is a great challenge for exporters to lock down the exchange rate and avoid exchange rate risk by means of forward selling and foreign exchange instruments.

Jie Hongbo thinks.

Jie Hongbo's "forward sale and sale" is the most commonly used financial tool to avoid exchange rate risk.

Shanghai Pegasus import and Export Trading Co., Ltd. chose to hedge the exchange rate risk by means of long-term hedging.

However, Mao Xiahua, director of the company's trade department, told reporters that the company's export volume reached $300 million in 2009. The number of hedging purchases for long-term Forex sales was less than 10%.

"The rate of forward settlement is relatively high, and it is difficult for enterprises to take up too much proportion."

Mao Xiahua said, "banks also do not want all the products of enterprises to make long-term settlement, thereby pferring all risks to banks.

Besides, this is a new financial tool. Most enterprises do not have the bottom of their minds. They must take a step closer.

Forward selling and selling is the main way of avoiding risks in China's financial market. However, it has higher requirements for the accuracy of the exchange rate trend, and the rate is relatively high. Therefore, many export companies do not carry forward hedging in order to lock risks.

Besides the forward selling and selling business, the current exchange rate hedging products mainly include structured foreign exchange business, selective trading, currency swap and so on.

In addition, the appreciation of the renminbi also makes us dollar loans more favored by enterprises.

CSCC has said that the trend of continued appreciation of the renminbi will continue to reduce Renminbi loans, increase foreign exchange liabilities and reasonably avoid exchange rate risks.

Three of the means to avoid exchange rate risk: local currency settlement

RMB settlement can evade appreciation risk and reduce currency exchange cost, but the difficulty is that the promotion scope is limited, especially in Europe and America.

It is reasonable for an enterprise to raise its price appropriately to compensate for the loss of profits caused by the appreciation of the renminbi, but this method has great limitations and can only be used in products with large export bargaining advantages in China.

In the foreign trade situation is not good, export enterprises profit margins more and more hours, evading exchange rate risk has become a big problem for export enterprises to survive or die.

The picture shows that foreign trade enterprises are receiving foreign businessmen at an exhibition.

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Pegasus: difficult RMB settlement

Vanward group: new price linkage mechanism

After the outbreak of the financial crisis in 2008, the appreciation of the renminbi stopped.

In June 19, 2010, after the second exchange reform started in China, the RMB exchange rate picked up again.

Will history repeat itself? 5 years ago, China launched the first exchange reform, and the RMB continued to appreciate 20% in 3 years. The second remittance reform which was restarted in 2010, as of now, has a slight appreciation of 0.7%.

However, judging from this month's performance, the renminbi did not appear to be the first strong trend of unilateral appreciation in the year of 2005~2008.

During the period, the central parity of the RMB against the US dollar has risen and fallen, the highest 6.7718, the lowest 6.8275, forming a two-way fluctuation trend.

However, compared with the boring exchange rate, enterprises are more concerned about the impact of exchange rate on profits.

Recently, reporters on the issue of RMB appreciation survey found that export companies generally believe that the continued appreciation of the renminbi in the second half is a big probability event, and that it will gradually increase.

It is estimated that the appreciation of the renminbi is about 3%~5%.

There is no doubt that RMB appreciation will become a "big worry" for export enterprises in the coming period.

At the beginning of the year, under the leadership of the relevant ministries and commissions in China, the relevant trade associations conducted a test of RMB exchange rate pressure on labor-intensive industries. The results showed that if the RMB appreciated by 3% in the short term, the profits of Chinese household appliances, automobiles, mobile phones and other production enterprises will drop by 30%~50%. Then look at the spinning and weaving industry. When the cost and price of other production factors are constant, the appreciation of the RMB will be 1 percentage points, and the profit of the enterprises will be reduced by 1%, while the average profit rate of the textile industry is actually only 3%~5%.

Entering the 2010, a favorable situation of foreign trade is now reversing, and export enterprises are turning from optimism in the first half to pessimism in the second half of the year.

Lu Xiaohong, director of Zhongshan Donlim power refrigeration electrical appliances company, said: "in the first half of 2010, the company usually received two months' export orders, but only one month's export orders could be received in the second half of the year. Now the overseas customers are obviously afraid to place an order."

The Ministry of commerce also predicts that the whole year's foreign trade will show a trend of "before and after".

When the foreign trade situation is not good, and the profit margins of export enterprises are getting smaller and smaller, the research results of Central University of Finance and Economics's banking research center show that about 57% of the small and medium-sized export enterprises have a profit margin of less than 5%.

Are small and medium-sized export enterprises ready?

For them, pformation and upgrading and strengthening strength are the absolute principles for development.

However, is there any short-term way to win the adjustment time for the small and medium-sized export enterprises when the RMB appreciates?

As one of the top foreign trade companies in Shanghai's textile industry, Pegasus is the first batch of pilot enterprises to make RMB settlement in cross-border pactions in 2009.

Pegasus is very welcome to use RMB settlement, because this can avoid the risk of appreciation, reduce the intermediate exchange links, and save a lot of paction costs.

Generally speaking, exchange risk costs account for more than 2% of the volume of trade.

In addition, through bank settlement, enterprises should pay a lot of fees to banks, and if we use RMB to settle accounts directly, we can save this cost.

However, RMB settlement is not what companies want to adopt, but also depends on customer matching procedures.

At present, only 15% of foreign trade businesses use RMB to settle accounts, most of which are Hongkong customers, most of which are settled in US dollars.

"At present, the extension of RMB settlement can not be extended, and customers in Europe and the United States do not accept RMB settlement."

Mao Xiahua introduced.

Data from the central bank also showed that in the first year of RMB settlement in cross-border trade, Hongkong and Singapore were the main areas for RMB settlement outside China. In the actual business of RMB payment, the total share of the two places accounted for 88%.

However, Hu Xiaolian, vice governor of the people's Bank of China, revealed in July 19th that the amount of RMB settlement in cross-border trade has reached 70 billion 600 million yuan since the beginning of 2010.

Take the Guangdong branch of the Bank of China, the largest cross-border trade settlement business in Guangdong Province as an example, as of the end of June 2010, the RMB settlement business of cross-border trade has exceeded 7 billion yuan, and its products cover a variety of remittances, collection, letters of credit, financing and NRA accounts.

RMB has begun to be used for international trade settlement, which is of far-reaching significance for the development of RMB. This means that the course of RMB regionalization and internationalization is starting.

Though it is easier said than done, it is also a breakthrough of zero.

The central government vigorously promoted RMB settlement. In 2009, Shanghai and Guangdong first launched the pilot scheme for RMB settlement in cross-border trade. In June 22, 2010, the pilot area of RMB settlement for cross-border trade was extended to 20 provinces (autonomous regions and municipalities directly under the central government).

However, reporters in the interview found that some export enterprises are not interested in this.

There is a constraint on the development of this business - both sides have RMB.

However, if the foreign currency is imported from the Chinese market, there will be no offshore market for RMB, and overseas customers will not be able to do this business if they do not have enough Renminbi.

"There are difficulties in pushing."

Du Xu, deputy general manager of Guangdong food import and Export Group Corporation, told reporters: "we talked with clients about RMB settlement, but the customers were not active, and the foreign countries were not too sure about the RMB settlement.

It is not easy to increase the risk of customer churn.

Four ways to avoid exchange rate risk: price linkage

Is there a win-win way to raise prices?

"From the second half of 2009, Wan he and overseas buyers formed a strategic partnership. We agreed in the annual contract that when the appreciation of the renminbi, the prices of export products also rose, forming a price linkage."

The director of marketing management center, Vanward group, told reporters that Vanward group's export profit was only 3%~5%, and when the renminbi appreciated, it had to raise its price.

"Many foreign investors can accept price linkage. There is no problem."

Gong Peiqian was delighted to recall that Vanward began negotiating a price linkage treaty with foreign investors. The conditions for a good contract stipulate that RMB appreciation will be adjusted by 1%, and that the price of RMB appreciation will be adjusted by 3% if the contract is worse.

At present, domestic export enterprises generally report prices once a year, and prices have been basically locked at the beginning of the year.

Once the price is fixed at the beginning of the year and the RMB appreciates, the order of overseas buyers will pfer all the exchange rate risks to the Chinese exporters.

"In the initial contract, we must clearly state the formula for price changes, otherwise, it will be difficult to talk about the price increase after the appreciation of the renminbi, which is very passive."

Gong Peiqian introduced.

However, this method is not one-way.

"Foreigners are very smart," Gong Peiqian said with a smile. "There are foreign businessmen who propose the corresponding conditions. When the export tax rebates increase, they also need to make 40% profits."

In this regard, Gong Pu Qian believes that "the requirements of foreign businessmen are reasonable."

Because enterprises and foreign businessmen have formed long-term strategic partnership, they should share interests and risks.

However, "even if there is price linkage, there is no way for the RMB to appreciate unilaterally, and fluctuations in exchange rates will bring us losses."

Gong Peiqian said distressed: "sometimes, when the order is placed, the renminbi is at a high level. When the order is not placed, the renminbi is at a low level. The average appreciation of the renminbi in a quarter is still not in the range of price adjustment, but the price of the enterprise has already been greatly affected by the purchase of raw materials, but the price can not be adjusted to make up for the loss."

It is reasonable for an enterprise to raise its price appropriately to compensate for the loss of profits caused by the appreciation of the renminbi. However, this method has great limitations and can only be used in products with large export bargaining advantages in China. Otherwise, the increase in prices will make foreign investors dare not place orders again.

Mao Xiahua, director of the trade and Management Department of Shanghai Pegasus import and Export Trading Co., Ltd. also said: "customers can not accept the price increase of old products. New products can raise prices, but overseas customers will not accept new products immediately. They usually need to take small orders to observe the feedback from overseas consumers."