In recent years the renminbi or RMB has been a hot topic.
There are two ways to refer to the currency of China, one being renminbi (translation: “the people’s money”) and Yuan.
While these are essentially the same, the renminbi is used when the money is used as a medium of exchange.
Yuan is reserved for referring to a unit of account within the Chinese financial system.
The countries of the world have their eye on RMB, as China is a major player (in fact, THE player) of the global export market.
Over the years, China has been working continually to keep RMB low to insure lower prices on its exports, attract more foreign purchases of goods, and maintain a competitive advantage over other countries.
Corporations and investors have historically feared investing in RMB because of China’s long-time policy of devaluing to attract export customers.
The general trend has been that China has continually kept the value low to help maintain an unfair advantage in the global export market.
However, since the COVID19 pandemic disrupted the supply chains and shut down ports all over the world, China has lost the tight control it once maintained over the value of the RMB.
Exports and imports have been down in all countries, and now China doesn’t maintain the same tight control over the RMB that it has had in the past.
To minimize the impact of inflation in China, the Chinese government has implemented fiscal changes that have allowed the RMB to appreciate.
So while traditionally China has worked to keep RMB low in value to help increase its export industry, the Chinese government can allow it to help drive foreign investment.
This is what is happening right now.
China has been the first country to recover from the global pandemic slump and its exports are booming.
Their export rates are actually at their highest rate on record, and the RMB continues to appreciate.
At 2% growth, China is the only big country recording economic growth and is offering investors both a positive interest rate and the prospect of currency gain.
China has also opened its bond market to foreign investors, and large asset owners in the United States and other countries have begun to move funds into the country.
China is on its way to becoming the second-largest capital market in the world.
The appreciation in the value of the RMB is assisted by the fact that it starts from a low base (2% of world reserve assets).
Although insufficient convertibility continues to hold it back somewhat, gains will be larger than those from the Euro, which makes up a larger portion of the world reserves (20% and holding steady at number 2 after the U.S. dollar).
Other factors such as European Central Bank struggles and uneven recovery also help narrow the gap between the RMB and the Euro and American dollar.
By buying into RMB when prices are low with a strong potential to increase in value, investors are currently in a strong place to take advantage of any growth opportunities.
The Impact on U.S. Supply Contracts
Investors are not the only group that stands to gain from this turn of events.
If this trend continues businesses in other countries that import supplies or cheap products from China have some leverage when dealing with their suppliers.
This could give exporters from other countries some leverage when negotiating contracts with Chinese factories and may be able to get terms that are more attractive.
Companies could reduce their procurement costs and hence increase their overall profits.
Affected by the pandemic, external demand in China has slowed down, and the appreciation of the RMB will increase the cost of export products, which in turn will spur the competitive spirit of export companies’ products in the South East Asia international market.
China will be forced to compete with these countries.
U.S. companies could gain additional leverage as the RMB continues to appreciate.
Companies may be able to negotiate with other south eastern Asian countries that are now more attractive due to the normalcy of the exchange rate of the RMB.
To be sure, some of China’s neighbors would stand to benefit if the yuan rose significantly.
Taking Vietnam as an example of this phenomenon, this nation took a page out of the China playbook and emulated their export model to speed economic development and draw more international business.
The competition from Vietnam and other smaller countries may pressure Chinese suppliers to reduce prices in order to remain competitive in a widened field of play.
The Bottom Line
For those with business interests in China, as well as companies who import materials or products, this is a time of opportunity and growth.
With the right strategy, suppliers can reduce their costs and maximize their profits during this time of regrowth from global pandemic lows. Look into competing suppliers to see if you can’t find a better price on a competitive product.
Even if you don’t find one, your interest could help in negotiating lower prices with your current supplier.
This can lead to greater profitability in your product sales.
For companies and individuals interested in profiting from the rising rates, by taking action and investing in RMB now, you have the potential to increase the purchasing power of your dollar and make a profit.
Do your research and find a good source of information on the current exchange rate between RMB and the U.S. dollar.
Recently, due to the Covid-19 pandemic and in the face of a US trade war, the government is allowing the RMB to appreciate in value once again, making it a prime time to really use RMB to your business's advantage.
Trading with suppliers in China with a stronger RMB gives you the leverage. So why not use it?
Buy RMB today with Statrys and start making better deals and stronger relationships with your Chinese suppliers.