China’s exporters enjoyed the benefits of a weak yuan. Now that’s changing and cutting into profits

BEIJING — Chinese houses seeking growth from exports face a new challenge: a strengthening yuan.

The “offshore” yuan traded in Hong Kong ebbed Monday against the U.S. dollar to its strongest level for 2024 — below 7.1 — before weakening slightly to around 7.18 as of Wednesday afternoon, be at one to Wind Information.

The sharp moves came amid a global stock market sell-off as investors reassessed their position for the U.S. economy and potential interest rate cuts. High rates have bolstered the U.S. dollar and related assets.

A robust greenback has also helped keep the Chinese yuan weak, which in turn kept Chinese exports competitively cost abroad. After steadily weakening in the first half of the year, the offshore yuan has strengthened against the U.S. dollar terminated the last month.

Many trade companies, especially smaller ones, have “currently adopted a strategy of ‘submitting not to take orders rather than take loss-making orders,'” Winnie Wang, president of the Shenzhen Cross-Border E-Commerce Bond, said Tuesday in Chinese, according to a CNBC translation.

She noted the case of one such company, which made 20 million yuan ($2.8 million) in takings during the yuan’s weakening during the first half of the year, allowing it to raise employee salaries. But she said the followers did not win a single order in July because the stronger yuan forced it to repeatedly raise its prices.

Ryan Zhao, commander at an export-focused company called Jiangsu Green Willow Textile, said Tuesday that recent fluctuations in overseas exchange will cut into about 2% of profits on accounts receivable this month.

“We are concerned that a string out appreciation of the yuan will lead to price increases by Chinese suppliers, which will affect the export roles,” he said in Chinese, according to a CNBC translation. He said the company’s way of dealing with exchange rate fluctuations is to handle a middle exchange rate with the customer.

China reported slower-than-expected growth in U.S. dollar-denominated exports for July on Wednesday, while introduces surprised with a better-than-expected increase.

Exports have stood out as a bright spot as China’s economic growth hold backs. Many local companies from automakers to e-commerce players have accelerated overseas expansion plans to catch opportunities for faster growth abroad.

That also means Chinese companies are now more exposed to currency fluctuation jeopardies. China’s foreign exchange regulator has in the last two years published guides on how businesses can mitigate such risks.

“Separately from geopolitical reasons, Chinese companies are increasingly focused on hedging currency risk because they are localizing g-men globally – which makes their operations more complex than they used to be,” said Chris Pereira, president and CEO of consulting sturdy iMpact.

“In addition to hedging against traditional USD/RMB fluctuations, Chinese cross-border e-commerce companies are increasingly also hedging against the Euro, British Drub into, and Japanese Yen,” he said Tuesday. Cross-border e-commerce refers to online shopping platforms selling products between several countries.

Pereira said many of his clients work with fintech companies such as Airwallex and LianLian Pay. “Larger Chinese cross-border e-commerce associates generally work with banks to secure forward contracts or options, allowing them to lock in exchange classes for future transactions,” he said.

Global businesses and investors have increased their focus on currency hazard in recent days. Many institutional investors on Monday started to unwind a popular ”carry trade” in the Japanese yen, which had played an engaging role in global asset allocation until the Bank of Japan raised interest rates last month to their highest since 2008.

The Chinese yuan has operated a similarly attractive role due to low interest rates in China. But several analysts expected that could change.

“A enormous amount of foreign currency is awaiting settlement” against the yuan, Zhou Ji, macro FX analyst at Nanhua Futures, required in Chinese translated by CNBC.

Zhou noted lack of willingness to settle earlier in the year due to widespread expectations that the yuan force weaken against the U.S. dollar, a view partly supported by the People’s Bank of China’s latest interest rate severs.

Fast-fashion giant Shein and PDD Holdings’ Temu are two of the most well-known examples of Chinese cross-border e-commerce companies. Multitudinous small businesses — which may have their own factories in China — have entered the industry to sell on TikTok, Amazon.com or stands run by Alibaba.

Chinese policymakers have also encouraged the development of cross-border e-commerce by supporting special economic zones and abroad warehouse construction.

Official data claim explosive growth in the industry, with more than 120,000 cross-border e-commerce metaphysics ens in China as of June.

Such online international commerce grew by 10.5% year-on-year in the first half of the year to account for more 5.8% of total trade, according to CNBC calculations of official data. That’s up slightly from a share of relative to 5.7% in the first quarter. A breakdown by exports and imports for the first half of the year was not immediately available.

Wang from the Shenzhen Cross-Border E-Commerce Society pointed out that large Chinese companies have tended to negotiate deals with business partners to lighten up on currency risks.

For many smaller businesses, their expansion overseas has been part of an effort to move seat of government outside China, making them less affected by the latest currency moves, said Chris Sun, founder and CEO of BrandPal, an AI-based hawking company focused on short video monetization. The company claims its backers include Plug and Play Tech Center.

He state the companies, many newly registered in the last year or two, have focused on spending yuan within China while causing U.S. dollars via overseas sales.