Having offices nearby, and numerous colleagues employed by, Wall Street, talk of currency is, currently, the currency of the day of our conversations; boring, I know.
It should come as little surprise to members of the fireworks industry that China is by far the largest economy whose currency doesn’t float; or, for that matter, that China’s economic output should lead it to become the world’s second-largest economy after the U.S.
Recent events affecting the euro notwithstanding, a consensus continues to grow that it is only a matter of time when the yuan will rise to become the new heavyweight in currency trading markets. This likely comes as little surprise to those who have traveled to mainland China, or those members of the fireworks industry that customarily purchase articles manufactured in China; meaning everyone.
Already, China’s robust economy, coupled with intense speculation that the yuan’s value to the dollar will ultimately be allowed to rise, is moving currencies world-wide. For instance, Asian currencies such as the Korean won and the Malaysian ringgit (China presently provides Malaysia’s central bank and sovereign wealth funds special quotas to allow them to gain a bit of exposure to China’s currency) and, to a lesser extent, the Australian dollar, are all seemingly beneficiaries of the yuan’s rise. Not surprising, given that these economies compete with China in a similar geographic marketplace and, therefore, have the leeway to let their currencies strengthen without fear of losing export competitiveness.
While it is the consensus in the financial markets that the current challenges facing the euro would not likely influence currency trading between the US dollar and the yuan—the reason being that the U.S. dollar has long reigned as the currency of choice throughout Asia—most recent events in Greece may inexorably spread to other European bloc members, especially the countries that comprise the already financially-strapped PIIGS (Portugal, Ireland, Italy, Greece and Spain). These events are likely to cause China to apply the brake to its plans of freeing the yuan, if only momentarily.
What does this have to do with purchasers and importers of articles manufactured in China? Plenty. It may be an opportune time to get ahead of imminent increase in the yuan and the inevitable price increases that will surely follow. Of course, Chinese manufacturers took the lead many years ago by announcing periodic price increases attributed to a variety of factors, including adverse currency changes (from 2005 to 2008 the value of the yuan against the dollar was permitted to rise more than 15%); just expect more of it throughout the decade.
Nevertheless, there are the obvious options to hedging the risks associated with a rise in the yuan by either increasing inventories with larger purchases, or by purchasing financial instruments pegged to the yuan or, alternatively, purchasing manufacturing facilities within China to manage costs, the ‘all in’ option. Whichever option you pursue, you are well-advised to confer with trained financial and legal professionals to perform your due diligence. In this author’s opinion, China is leading the world-wide economic recovery, and many other more-learned professionals seemingly agree.
