November 2, 2011Yuan Hits Hurdle on Road to Wider Use—U.S. Businesses
China's effort to make the yuan a global reserve currency has hit a snag: Few U.S. firms are taking advantage of easier access.
To help spark wider use of the yuan in international trade, China has made it easier for overseas companies to buy from local suppliers and pay Chinese employees in yuan. China has liberalized currency controls and encouraged an offshore yuan market in Hong Kong, creating an outlet for moving the currency across the Chinese border.
But while American companies have poured into China to take advantage of low labor costs and a burgeoning consumer market, they have been slow to make use of the yuan.
Corporate executives said it is difficult to buy and sell in yuan because of the paperwork and bureaucracy involved in the required government registration process. And it still is easier to pay in dollars because most international business with China is done in U.S. currency. The convenience of paying in dollars outweighs the potential cost of an unfavorable move in the yuan-dollar exchange rate.
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Harman International Industries Inc. is among the U.S. companies expanding in China but sticking with the dollar. The audio-equipment maker's revenue from China was $269 million in the fiscal year that ended in June, up from $35 million in fiscal 2009. The parts Harman buys in China are produced in factories owned by Japanese, U.S. and European corporations, which are happy to take payments in dollars. The stereos sold tend to go to the Chinese arms of multinational auto makers like General Motors Co., which tend to do business in dollars.
The weak yuan lowers the cost of manufacturing in China, making goods produced there more competitive when selling abroad. But over the past year that advantage has been eroded by rising inflation in China and Beijing's decision to raise the range in which it allows the yuan to trade against the dollar.
If China can liberalize its foreign-exchange and interest-rate policies, markets will be able to set the prices borrowers pay, helping to squelch asset-price bubbles like the run-up in property prices China is experiencing now.
The cost of doing business in yuan is a facto for small businesses.
In addition, a geopolitical rationale also drives Beijing. "There's a broader vision of wanting to internationalize the currency because that's the way you have more international influence, commensurate with the size of the economy," said Alan Ruskin, global head of Group of 10 foreign-exchange strategy at Deutsche Bank in New York.
Against this backdrop, China is trying to encourage more businesses to use the yuan. It has worked—a little. Trade settlement in yuan totaled $151 billion in the first half of 2011. That is a more than 13-fold increase over the prior year, according to the People's Bank of China, the country's central bank. But the total still represents a fraction of China's overall trade.
Harman may start using yuan when Chinese car makers like Geely Automobile Holdings Ltd. start buying its products, which they have said they plan to do within three years, said Chief Executive Officer Dinesh Paliwal.
"I'd be very inclined to enter into yuan contracts with Chinese companies," he said. "That will be a natural step as we're growing."
Meanwhile, banks in the U.S. are stepping into the yuan-settlement business. San Francisco's Union Bank, owned by Bank of Tokyo-Mitsubishi UFJ, recently began processing payments in yuan for its U.S. corporate customers. The bank exchanges customers' dollars for yuan in Hong Kong. Those yuan then move into China, where they are used to pay employees and vendors.
"Large corporates who are manufacturing in China or have a large exposure to China" are already using the service, said Kate McNally, a vice president and foreign-exchange adviser there. The bank declined to say how much yuan volume it has processed.
For smaller companies, the cost of doing business in yuan still is a factor. To make yuan payments in China, foreign companies first need to persuade Chinese suppliers to go through the government registration process to become a Mainland Designated Entity, which is permitted to receive money from abroad in trade deals.
Foreign companies wishing to trade in the Chinese currency also have to persuade vendors to write invoices denominated in yuan, rather than in dollars. Because Chinese vendors invoicing in dollars are taking on the foreign-exchange risk in the transaction, they typically charge a bit extra to cover this exposure.
A yuan-denominated invoice shifts the risk onto the foreign company, giving them more flexibility to hedge away the exposure, said Jens Buckler, regional sales director at Travelex Global Business Payments in Washington, D.C.
The chief financial officer of a small, closely held shoe importer said switching to yuan-based payments would help lower costs despite any fee for the increased foreign-exchange risk. But the company, which moved production to China from Europe over the past 18 months, doesn't have the money or time to investigate converting its payment systems and procedures, said the company's finance chief.
Paying in dollars is typically more expensive, because vendors build in a cushion when they calculate prices. "We feel we're at a disadvantage because we're unable to separate the yuan currency change from rising costs in China," the finance chief said.
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