China RMB Value ‘Good for Many Foreign-Owned China Businesses’

August 22, 2011 Posted by China Briefing Reading Time: 3 minutes

“China-based CFOs are going to be happier than U.S.-based ones right now”

Op-Ed Commentary: Chris Devonshire-Ellis

Aug. 22 – With continuing news that the Chinese government intends to stick to their path of their slow rise currency plans despite the U.S. downgrade, many foreign-owned businesses in China are more than happy that the yuan continues on its present course. The RMB actually climbed beyond 6.4 against the U.S. dollar last week for the first time since 1993, causing speculation that the People’s Bank of China could be about to allow the yuan to appreciate more quickly. Most analysts in the media, however, have dismissed such moves. That’s almost certainly a good thing for most of the foreign-owned invested businesses in China. They have been hit hard this year with increases in mandatory welfare payments, salary increases and a rise in commodity prices mainly caused by inflation.

In catering for example, the price of pork – a staple of Chinese cuisine – has doubled in the last nine months. In planning budgets for 2011, knowing that such increases would impact upon profitability for the year, I know that many foreign-owned businesses expected margins to shrink and a round of belt tightening to occur. Prudence has been the watchword for China CFOs this year. However, although the price increases have hit home, these have been offset by the currency position for those businesses that receive largely RMB income, yet consolidate group accounts elsewhere.

Having received the half year financial statement for our own business, a pleasant surprise was in store. Increased overheads, yes, but offset by the value of the RMB/US$. That alone added about six points to our profit margin for the year-to-date, meaning we’re on track to repeat and possibly exceed levels achieved during 2010. Given the significant increase in operational costs for China businesses, such a situation comes as a welcome boost. There remains the small matter of behavior in the second half of the year of course, so it is too early to leap to conclusions. But having such a feature to factor into accounts will, in a roundabout way, increase the profitability of China subsidiaries of international companies, as long as the RMB/US$ position doesn’t alter too much. The fact that many U.S. and European companies are suffering in their domestic markets but China seems to be booming is a case in point – the currency issue dictates that China-based CFOs are going to be happier than U.S.-based ones right now.

It’s also a curious by-product of the Chinese position in dealing with the U.S. dollar. I am sure that the People’s Bank of China doesn’t factor into the equation too much any concerns about foreign-invested enterprises in China – it’s a one party state and it’s the well-being of Chinese nationals and businesses they care more about. But with nearly all of those not able to take advantage of the increased profit margins an undervalued RMB brings to consolidated group accounts, it’s a nice little bonus for those MNCs who can and who provide group accounts consolidated and valued in U.S. dollars. It’s also good for the development of China-based businesses. Without that additional six points, we would have found it harder to expand by a further two offices this summer. As it is, the canny MNC in China will be using this windfall to invest at a time when many are feeling the pinch. It’s a rare case of it being good to be in China right now with current policies benefiting FIEs as opposed to domestic protectionism. Let’s hope it continues as a byproduct of the existing Central Bank policy while we adapt to having to absorb higher operational overheads.

Chris Devonshire-Ellis is the founding partner and principal of Dezan Shira & Associates, and the founder of China Briefing. He has over 25 years of experience in China, including 20 running his own companies. He can be reached at chris@dezshira.com.