How does the depreciation of the Yuan impact on import and export companies?

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The depreciation of the Yuan is making impacts on Vietnam import and export businesses

Price squeezed

China is quite a large import market of Vietnam. According to the statistics of the General Department of Customs, in October, 2016, there were some large export commodities to China such as agricultural products with $ US 2.1 billion, wood and wooden products with $ US 802 million, fishery products with $US 540 million, etc., when the exchange rate of the Yuan devaluates, Companies are worried about decline in productivity of the above commodities.

The reason for the above situation is that Chinese partners will ask for a discount on selling prices in accordance with the depreciation of the Yuan. According to Mr. Nguyen Van Ngoc, Head of Export Sales Department of Co Do Agriculture One Member Company Limited (a rice exporter), because of an official exporting company, the company’s commercial contracts are paid in USD. But the Yuan is currently devaluating lower by 1 % than the USD, partners will ask for a discount on purchasing prices to compensate for expenses. Thus, Mr. Ngoc acknowledged that Chinese partners requested to cut prices down to 1% compared to previous agreements. However, only 3 -4 thousand tons of rice are exported to China, the discount does not affect the company’s revenue.

Similarly, Mr. Tran Ngoc Hiep, Director of Hoang Hau Dragon Fruit Company Limited said that, the end of a year is the hot period for goods import and export to China, so this is a chance for Vietnam’s companies to raise prices. But with such a sharp decreasing movement of the Yuan, companies not only don’t have the chance to raise prices but also are squeezed in prices by partners.

It is noteworthy that China is now applying the VAT rate from 13% to 17% for imported goods that makes the companies fear of decline in export volume against the previous period. For the above impacts, goods imported from Vietnam to China are increasing in price compared to goods imported from other countries. A representative of Co Do Rice Export Company stated that the Chinese partners declined about 10% of imported volume due to concern of a sharper decrease in the Yuan and must seek a cheaper source of goods.

From the above concerns, many companies acknowledged that they have been expanding to seek new markets to avoid dependence on a volatile market such as China. Mr. Tran Ngoc Hiep said that, recently, his companies have focused on exporting dragon fruit to Japan or European countries, despite the high transport costs and irradiation costs and more austere requirements on quality, the added values of goods is much higher than exports to China. Therefore, his company is improving farming technology to boost the exports to the above markets.

Fear of loss of market

Though recent years, although companies have focused on expanding markets, they still depend on the Chinese market. According to statistics of the Vietnam Textile and Apparel Association, Vietnam now just meets 30% of local domestic demand for raw materials; the rest must be imported from foreign countries, especially from China. Hence, with the depreciation of the Yuan, companies which import raw materials from China may benefit from cheap prices.

A representative of Phong Chau Company Limited shared that, his company always try to remain at 70% of domestic raw materials and 30% of imported materials but his company now is gradually moving to cheaper markets such as India, Korea, etc even American. Currently the Yuan is more volatile so the reduction of dependence on China will help the company avoid the impacts despite increase or decrease in the Yuan exchange rate

But in contrast to benefits from the import of raw materials, many Vietnamese products are in fear of loss of market from the incoming of low-priced products from China. According to the statistics, Vietnam is still in trade deficit with China, the devaluation of the Yuan will affect the balance of trade. Typical is steel industry with 60% of imported volume from China, recently, the Steel companies have suffered a great competitive pressure from low-priced Chinese products. With this depreciation of the Yuan, the domestic steel companies are facing more difficulties.

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Not only the steel sector but also other sectors must face competitive risks from Chinese products. Therefore, many experts said that, together with the depreciation of the Yuan, the State Bank will maintain the USD exchange rate at a high level as one of the assistances to restrict the deficit from China. However, with the unpredictable fluctuations of the global economy, the relevant authorities still have to monitor and issue reasonable regulations to avoid affecting the operation of the companies.