China is Canada’s second-largest trading partner. According to the Government of Canada, since 2001 Canada’s relationship with China has grown faster than their trade relationships with any other global partner. However, in a recent briefing, China’s foreign exchange regulator urged businesses operating in the country to strengthen their risk management systems to lessen the impact from rising two-way volatility in the Chinese yuan.
Importers are buying goods from China using US Dollar, however, the Chinese Yuan, or Renminbi (RMB) has appreciated against the USD by over 8% in the past 12 months. Suppliers in China are forced to increase their US dollar price to help offset the FX loss during the currency conversion back to their local currency, meaning Canadian consumers have to pay a higher price.
James Lei, Senior Corporate Dealer at moneycorp Americas, has experience as both a business owner and as a financial services industry professional. With 20+ years of experience in the industry, he has gained expert knowledge in the FX hedging, financial planning and wealth management, private equity investments, corporate strategic consulting, and commercial banking sectors.
Here, Lei speaks about the missed FX opportunities for Canadian-Chinese businesses:
As Chinese businesses continue to globalise and technology continues to advance, companies will begin to face new and exciting opportunities that can help drive their business to the next level. However, new opportunities are accompanied by new challenges, especially from a global payments perspective. Global payments providers must aim to offer innovative solutions to resolve these new challenges while protecting the bottom line.
Regulatory Restrictions and Challenges Ahead
The People’s Republic of China has strict regulations in place for moving money in and out of the country. According to Statistics Canada, over 3,750 Canadian enterprises exported goods to China in 2018. For many Chinese businesses operating in countries like Canada, these regulations can quickly become a hassle if you plan to send or receive funds from your home country. Unfortunately, the challenges don’t stop there. Business owners may find themselves with limited options when it comes to payment providers who can simplify the currency transfer in and out of China. A provider who can speak the local language, understands the Chinese government regulations and has the ability to streamline the payment delivery process is key for success in today’s global market.
At the moment, most importers are buying goods from China in US Dollars (USD), however, the Chinese Yuan, or Renminbi (RMB) has appreciated against the USD by over 8% in the past 12 months. This ultimately means that for every US dollar the supplier receives in China, they will receive 8% less in Renminbi. Taking the complication further – even without the rate fluctuations between the two currencies, Canadian importers will still face two layers of conversion charges: one in Canada (from CAD to USD) and one in China (from USD to RMB). What does this mean for the importer? Suppliers in China will be forced to increase their US dollar price to help offset the FX loss during the currency conversion back to their local currency, driving up costs for Chinese-Canadian business owners and ultimately Canadian consumers. With China being Canada’s second most important mutual commercial partner, this should cause concern for both businesses and consumers alike.
Foreign Exchange and Risk Management
One of the main opportunities we are currently seeing in the Chinese-Canadian market is the potential improvement of foreign exchange knowledge among business owners. Shockingly, most private Chinese-owned small and medium-size businesses still lack an understanding of how FX risk management strategies can help improve their business’s bottom line. Instead, business owners have historically concentrated on simply chasing the best available price for each trade, otherwise known as a spot trade. For example, an importer may not realise that by paying US dollars to China they are subject to multiple FX conversions which increases cost and doubles the currency risk. This is because suppliers in China have limited FX risk management tools available to them, which forces the supplier to convert the US dollars to Renminbi at a poor rate of exchange and high fees.
In the long run, businesses without an FX risk strategy could suffer losses and actually pay more for trade at the current available exchange rate without even noticing. Even more, as a result of the limited market knowledge, service providers in Canada may lack the motivation to provide more proactive and tailor-designed FX solutions. By simply switching from US dollar payments to Renminbi payments, business owners may easily eliminate the FX cost and risks that their Chinese suppliers are exposed to.
Experienced Chinese-speaking foreign exchange dealers are very limited in the Canadian market causing a language barrier between Canadian global payment providers and Chinese-speaking business owners. This issue, although widely ignored by global payment companies, has forced Chinese business owners to walk away from opportunities to enhance their international money transfers and instead force them to only trade at a basic level. We find there is an opportunity to introduce more Chinese-speaking foreign exchange dealers into the market to help bridge the service gap.
With the launch of moneycorp’s China division initiative, we are focused primarily on educating the market about the options available to business owners when it comes to global payments in both English and Chinese (Mandarin and Cantonese). By reducing the amount of currency conversions between companies and advising to switch from USD to RMB invoicing, businesses can protect the bottom line and indulge in profitable trade. While there are immense opportunities for Canada-China to collaborate in expanding businesses, the motivation to engage in a bilateral relationship needs to be addressed in order to benefit both the countries and those business operating within their borders.