Euro depreciation hits exporters

Updated: 2010-12-10 13:05

By Shi Jing (China Daily European Weekly)

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Euro depreciation hits exporters
For many exporters in East China's Zhejiang province, the biggest concern is how far the euro will depreciate in the coming months. Zhang Heping for China Daily

Zhang Feng, a football fan in East China's Hangzhou, is tracking the fluctuating yuan exchange rate against the euro and other major world currencies more closely now than the scores from the Chinese Super League.

What he is seeing is disheartening. The seemingly unstoppable depreciation of the euro is eating into his export company's profits.

As head of foreign trade at Zhejiang Shuaihong Garment, Zhang, like thousands of exporters from this industrial powerhouse of China, feels helpless against the pressure from the currency front.

He says all his company's exports to Europe are settled in euros, which, for many years, was strong and stable. The outbreak of the sovereign debt crisis in Greece earlier this year changed all of that, forcing to the open some of underlying problems of eurozone countries including Ireland, Portugal and Spain.

While the stronger European economies are mounting rescue operations to stabilize the economies of the weaker eurozone countries, the euro has been on a downward slide.

The debt crisis that broke out in Ireland in November has hit the euro harder than any economic troubles before. The latest rates published by the China Foreign Exchange Trading System & National Interbank Funding Center shows the euro slumping to 8.6718 yuan on Dec 1, down from 8.7645 the day before. The euro stood at 9.8 yuan at the end of last year.

"Every small change in the exchange rate can mean hundreds of thousands of yuan in profit to us," says Zhang. For example, a 10 percent fall in the euro against the yuan last month wiped out more than 50,000 yuan of profit in Zhejiang Shuaihong's books, Zhang says.

China Customs statistics show that exports to the European Union totaled about $252.7 billion (189.4 billion euros) in the first 10 months of this year, up about 33 percent from the same period a year earlier. The true impact will be shown in the following months.

But Jin Xuejin, deputy director of the College of Economics from Zhejiang University, says the impact on garment exporters due to the appreciation of the yuan against the euro is inevitable.

"The European Union has been the second-largest export market to China, taking up about 15 percent of China's export volume every year," Jin says.

"The appreciation of the yuan will definitely harm the business of these exporters."

What's more, the yuan's appreciation against the euro has increased prices of Chinese exports, undermining competitiveness in Europe. Austerity programs of various European governments compound the problems, having the effect of depressing aggregate demand.

The impact of all this is reflected in the order books of many Zhejiang factories. "Orders from our major European customers in Germany, Greece and some other countries have been falling," Zhang says.

So far, "we have received only two firm orders of garments for delivery in the spring", Zhang says. By this time last year, "our order books were full", he says.

"How far the euro will depreciate in coming months is our biggest concern right now," Zhang says.

Attempts by many Zhejiang exporters to persuade their European buyers to settle in US dollars have made little headway. "There is little incentive for them (European buyers) to comply with our request," Zhang says.

Smaller manufacturers of a vast variety of consumer goods also reported declines in orders from Europe.

"One of my Italian customers used to place an order every three months," says Fang Xiangyun, who has been in the accessory export business in Yiwu International Trade City for about six years.

"But this year, she has only made one order so far, in early February."

Hangzhou Light Industrial Products Co has been exporting goods, such as curtains and beddings, to European countries, including the Netherlands and Germany, for more than 18 years.

But even their long-term customers are now pulling back because of the euro's depreciation, says Yang Huimin, manager of the company's textile department.

"The deprecation of euro is sure to exert some influence on our business because the purchasing power of the European people has been impaired," says Yang, who has been working for the company for about 15 years.

"The average size of orders we are seeing now is smaller than in past years."

But a director from the Zhejiang branch of the China National Garment Association, surnamed Han, says a number of these export companies are quite far-sighted, settling in yuan or US dollars instead of euros. Or they are settling at a specified future date, which can also avoid the fluctuation of interest rates.

"While economic experts and government officials express much concern over the future of these garment export companies, it turns out that they have been overreacting to some extent, as most entrepreneurs of these companies, especially from those with a long history and more experience, are much smarter than expected," says Han.

Hangzhou Hangsi Fashion Corp, a leading garment export company in Zhejiang with a registered capital of 30 million yuan, has expanded its largest market, in the UK, in terms of its export business. By settling in US dollars, it has avoided heavy losses.

"The European Union as a whole being heavily in debt, together with the depreciation of the euro, have definitely impaired our revenue there, especially the quantity of garments we export," says Wang Lan, a sales manager of Hangzhou Hangsi.

"But by using the US dollar to close deals, the losses have been greatly reduced, compared to those using the euro."

Yiwu Red Pine Hotel Supplies Co has seen little losses this year although about 70 percent of its goods are exported to France, Germany and Italy. As general manager Jiang Gensheng says, they have been using the yuan in dealing with their European customers.

"Many export companies in Yiwu turned to the renminbi for settlements in late 2008 due to the rapid appreciation of the yuan. Therefore, the companies here have avoided the impact of the euro's depreciation this year," says Jiang.

As Jin Xuejin suggests, making forward settlements is one way to avoid the impact of exchange rate fluctuations. Contracts are signed with a bank, making it clear the foreign currency, which will be exchanged into yuan at a designated future date, will be calculated according to an exchange rate written in the contract.

"Learning from the lessons learned in the 2009 world financial crisis, we are now mostly making forward settlements," Yang said.

"In this way, we can maintain our profits at an expected level."

But Yao Jian, a spokesman for the Ministry of Commerce, warns that the rising cost of labor in China is something export companies should not overlook in this wave of euro depreciation.

In May this year, Yao said at a media conference that the appreciation of the yuan against the euro will definitely "exert much pressure on Chinese exporters in terms of cost".

Han, from the Zhejiang branch of the China National Garment Association, says labor costs in Zhejiang garment factories have increased by at least 12 percent this year. "The prices for raw materials such as cotton have also seen dramatic increases this year," Han says.

Liu Junyun, who has been exporting garments to Spain from the Hangzhou Si Ji Qing wholesale garment market for about seven years, says that at some shops at the market this year, salaries of shop assistants have increased substantially.

"The basic monthly salary for my shop assistant has risen from 1,500 yuan to 1,800 yuan."





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