How Do Chinese Shoe Companies Hedge The Risk Of RMB Appreciation?

The US economy is going into recession, the pace of RMB appreciation is increasing, and the cost of labor is rising. How can China's export enterprises cope with this internal and external situation?

A research team from Goldman Sachs found that Chinese enterprises use three major tools to hedge these risks: operational hedging, full exchange rate risk hedging and financial hedging.

Deng Tishun, managing director of the research team and Goldman Sachs (Asia) limited liability company, told the first financial daily that they surveyed the enterprises in Southern China's container and footwear manufacturers. These export oriented enterprises usually hedge their exchange rate risks through three ways: first, operational hedging: a large number of enterprises engaged in processing trade are importers of raw materials / semi-finished products priced in US dollars.

Although they have to lower the prices of their exports because of the strong renminbi, the increase in the purchasing power of the renminbi means the fall in the cost of imported goods, leaving room for profit margins.

The two is complete exchange rate risk hedging: those with strong bargaining power based on scale or high quality products can be priced in Renminbi and effectively pfer exchange rate risk to customers.

The three is financial hedging: some enterprises choose to hedge exchange rate risk through financial instruments, such as exchange rate swap or non deliverable forwards, and minimize the impact of unexpected exchange rate changes and protect the profitability of enterprises.

Deng Tishun said that the sample of enterprises in this survey is small, and they are relatively well-known enterprises with large scale effect.

Therefore, Goldman Sachs's research team believes that the revaluation of the RMB relative to the main trading partners will bring pressure to many uncompetitive edge enterprises in the near future.

At the same time, Deng Tishun told reporters that despite this, China still has cost advantages.

A spokesman for a super ODM said that despite the appreciation of the exchange rate, China's market is still the most cost advantage in the manufacturing sector from a global perspective.

Will the appreciation of the renminbi affect China's exports?

This seems to be a self-evident question, but if we compare the Renminbi with the currencies of China's main trading partners, we will see very different situations.

Although the renminbi has appreciated more than 9% against the US dollar since the beginning of 2007, the renminbi has depreciated against the euro and yen's nominal and real exchange rates this year.

Deng Tishun believes that the sustainability of the current strong demand from non US economies largely depends on whether or not the impact of the US slowdown is spreading to other parts of the world.

Therefore, he suggested that we should pay close attention to the demand indicators of non US economies and the changes of their exchange rates relative to the renminbi so as to assess the status of China's export sector.