Talks of a potential currency war with China have made the headlines lately, and if you import or export, you may be wondering how a currency war may impact your business. Recently the People’s Bank of China (PBOC) let the yuan drop to its lowest value since 2008, changing from the symbolic 7-1 ratio to the dollar. This change prompted the U.S. Treasury Department to label China a currency manipulator, while China states the fluctuation is due to market forces.
So is China a currency manipulator? The 2015 Trade Enforcement Act lays out three criteria that constitute currency manipulation.
- An annual $20 billion bilateral surplus with the U.S.
- A large enough overall current account surplus (above 3% of the country’s annual GDP)
- Persistent one-sided intervention in the foreign exchange market to depreciate its currently
According to the Treasury’s most recent report, China is only meeting the first of the three criteria. However, both importers and exporters will be impacted by the lowered yuan.
If you’re a U.S. business importing from China, you may benefit from a strong dollar and a weaker yuan, but it’s important to remember that tariffs still need to be taken into consideration. If you export to China, you may be seeing more competitive pressure and an increase in costs by your customer when importing U.S. goods and services. This may make now an ideal time to explore building relationships in other competitive export markets.
U.S. companies doing business overseas with nations other than China may also see an impact due to this change in the market. The trade ecosystem is reliant on both the Chinese and American economies and there may be a slowdown in overall global growth.
A currency war, especially one between two of the world’s largest economies, would also impact the overall currency market. The PBOC can offset any currency action by the U.S. by simply buying U.S. government securities to strengthen the U.S. dollar. Conversely, the U.S. government can buy Chinese debt to strengthen the yuan. Both of these actions would strengthen or weaken the dollar or yuan versus the euro or Japanese yen, for example. This type of scenario opens up companies to foreign exchange risk, however, there are risk solution services companies can use to better manage international cash flow while reducing the risk of currency fluctuations. Businesses can utilize hedging tools, such as Forward Contracts, to lock in their margins and be immune to potential adverse moves in the markets.
Even though the current situation may seem bleak, it’s important to note that neither China nor the U.S. want to end trade with each other all together. It’s a matter of finding common ground. In the meantime, businesses can look into other markets while maintaining strong relationships with their Chinese suppliers and customers. It’s also an ideal time for companies doing business abroad to consider foreign exchange risk solutions to protect themselves from currency fluctuations.
About the Author
Jon serves as Director of Global Banking Business Development for First National Bank of Omaha. Since 2011, he is charged with the enhancement and growth of the bank’s international portfolio. Jon has 20 years of experience advising a wide array of clients on strategies to mitigate international risk. He is a 1993 graduate of the University of Iowa with a BSBA in Finance.