Once sign of the move away from the dollar as reserve currency that we’ve noted before is the shift away from its use as an invoicing currency in commercial transactions. The Financial Times provides another example, namely, that Chinese exporters are avoiding the dollar:
Rising numbers of Chinese exporters are shunning the US dollar or devising ways to offset the impact of the falling currency as they confront rising labour and raw material costs at home.
According to Alibaba.com, the online company that matches Chinese suppliers with international buyers, the vast majority of their almost 700,000 Chinese suppliers no longer use dollars to settle non-US transactions in order to minimise foreign exchange risk.
“They are moving to euros, pounds, Australian dollars or even quoting prices in renminbi,” David Wei, chief executive, told the Financial Times. Moreover, he added, prices quoted in dollars were now often valid for just seven days compared with the 30-60 days common previously.
The dollar has long been the currency of choice for Chinese and other exporters around the world. However, the impact of its recent weakening has led exporters to begin questioning its place as the de facto world currency.
The renminbi, which western governments have long alleged is undervalued, thus giving Chinese exporters an unfair advantage, has appreciated 6.7 per cent against the US dollar in the past six months. Economists expect it to rise 10-15 per cent against the dollar in 2008 and it is expected to rise a further 10 per cent in value this year, according to Qing Wang, economist at Morgan Stanley China. He warned that pace could quicken to more than 15 per cent should inflation in China, already running at a high level, continue to climb.
Quanzhou Leething Garment & Knitting, a Chinese men’s underwear factory, said it had started encouraging clients to pay in euros instead of dollars in November. While the Chinese currency has appreciated against its US counterpart in recent months, it has moved little against the euro. Orders placed in US dollars are now subject to having their prices adjusted according to the latest exchange rate just prior to shipping, said a company spokeswoman.
Dongguan Wang Cai Garment, based in the southern Chinese province of Guangdong, exports mainly to Europe and quotes prices in US dollars but this year began updating their quotations every week.
Other companies have taken more unusual approaches, such as setting their own exchange rates and, therefore, in effect raising prices.
Xiao Zheng, chairman ofDongguan City Shima Toys in southern China, said its price quotations were valid for three months but were calculated based on an exchange rate of Rmb6.6 to the dollar.
With the official exchange rate at Rmb7.01 to the dollar yesterday, this in effect raised prices 5.8 per cent.
“We are thinking about renewing our quotations every other month and we are also going to offer quotations in euros very soon,” Mr Xiao said.
Bruce Rockowitz, president of the trading arm of global supply chain company Li & Fung, said many Chinese companies still favoured US dollars because “everybody is used to using [that currency]. But it all comes out in the price.”
William Fung, managing director of Li & Fung said international buyers would have to accept higher export prices from China, especially for goods such as toys that are largely made only in the country.
“The final result is they will buy at a higher price, but at lower volumes,” he said. Mr Fung added that retailers are mitigating the effects of higher costs by locking in proprietary, or exclusive brands, which in turn allows them to charge higher prices to consumers.
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After mature reflection, I think people are wrong when they say it doesn’t matter what currency the invoice is in. This includes for oil, which of course is mostly priced in USD for the moment. A price in a currency implicitly means that the currency is accepted for payment. It seems completely plausible that there will come a point, should the Fed start monetizing Agency debt or what have you, that no one outside the U.S. (and not everyone inside) will accept dollars for payment. They will want a hard currency.
That’s the road the Fed has put us on. By putting the full faith and credit of the U.S. behind toxic waste, it is now possible that the full faith and credit of the U.S. will become like toxic waste – no one will want it.
Of course it matters what currency the invoice is in. If the invoice is in Renminbi, U.S. importers takes on the currency risk. If the invoice is in US Dollar, Chinese factory takes on the currency risk.
It’s not a big issue for large U.S. corporations, since they probably have knowledge and experience hedging currency risk. This will impact a lot of small to medium size business that cannot appropriately hedge their risk.
Maybe this will also help pulling some manufacturing back to the U.S.
Yes, it does effect currency risk. Sorry, I was talking about something else.
Would somebody mind putting a side by side comparison of the difference so that everyone can see number examples? I think I understand what we are looking at, but numbers would really illustrate what it is this action could have in the US.
I think anyone reading the article who sincerely wants a better understanding of how this can acutely affect things would appreciate it—such as myself.
thanks in advance.
It is most interesting to see the market work, isn’t then?
The more lopsided the trade policy, the more it pushes the US to the dreaded self sufficiency. Montana synfuels anyone ?
Gee, roaring inflation in the peg countries. who would have ever thunk it. Do ya think it may be related to the gawd awful trade deficits ?
A similiar misintended consequence playing out on Iraq.
OK. I’ll just wait until the shooting starts.