Zhejiang export shoe companies hit the "exchange rate war"

Since September, as the exchange rate of the renminbi has risen, the export profits of leather shoes have remained only 1-2 percentage points. If the deduction of the rise in production costs caused by the appreciation of the renminbi, net profit has been negative. If the exchange rate of the U.S. dollar continues to decline and the yuan further appreciates, Zhejiang, which is a major foreign trade province with low-end manufacturing, will have a large number of SMEs shutting down.

According to the findings of the Central University of Finance and Banking Research Center, approximately 57% of small and medium-sized export enterprises have an after-tax profit rate of less than 5%. If the cumulative appreciation of the RMB is 3%-5%, this part of the company will be in a state of low profit and loss. Since the central bank started a new round of RMB exchange rate mechanism reform on June 19 this year, the RMB has appreciated by more than 1.7%, and the “critical point” is approaching.

According to a sample survey conducted by the Zhejiang Provincial Department of Commerce, one-third of the nearly 1,500 key monitoring companies in the province had a year-on-year decline in profits from January to July this year, due to the fact that export prices cannot fully absorb cost-rising factors. However, it is worth noting that if the renminbi continues to appreciate, even if the company locks in the 60% order settlement rate, the remaining 40% of the order's corresponding exchange rate losses, coupled with rising labor costs and raw material prices, can still “eat” most of the profits.

As a result of the appreciation of the renminbi, the company’s production and operating costs have further increased. In order to avoid risks, on the one hand, many Zhejiang companies avoid large orders with long delivery times and large quantities. On the one hand, they develop new products to achieve price increases. At the same time, the “locked-in exchange rate” (foreign currency loans and repayments) model, as well as financial derivative instruments such as forwards, swaps, and options, are also favored by some Zhejiang businessmen.

Zhejiang's export-oriented strategy is difficult to sustain, and it is imperative to coordinate the two kinds of international and domestic resources and two markets and implement a competitive-oriented strategy. Appropriate appreciation of the renminbi can create a “forced” mechanism, forcing companies to transition into emerging industries, or upgrade their value chains by increasing R&D investment.