LA Textile Industry, Universities, and Construction Companies Most Impacted by Foreign Exchange Risk
Western Union Business Solutions, a business unit of the Western Union Company, a leader in global payment services, today announced results of a survey of Chinese companies which found that by settling transactions with Chinese exporters in U.S. dollars (USD) instead of Chinese yuan (CNY) American businesses paid approximately $2.4 billion in fees to account for foreign exchange risk.(1)
The industries most affected by these transaction fees are those that import the highest level of goods and services from China by transaction value. In Los Angeles, the number one industry that made payments to China in 2011 by value according to Western Union Business Solutions data is the textile industry, followed by universities and construction companies. LA-based universities in particular saw strong growth in the amount of money they sent to China in 2011, with the value of payments more than trebling compared to 2010. The textile and construction industries grew by 38% and 10%, respectively, while payments made to Chinese companies increased by 71% for the city as a whole.
"The U.S. is the number one export destination for companies based in China," said Alfred Nader, Vice President of Corporate Strategy & Development, North America, at Western Union Business Solutions. "To date, the vast majority of transactions between companies based in the U.S. and China have been settled in American dollars. It is time to take a step back and evaluate to what extent it makes sense for American companies to continue to pay Chinese exporters in something other than their preferred local currency."
Western Union Business Solutions' survey of more than 1,000 Chinese companies who are able to settle merchandise exports in CNY (known as mainland designated enterprises, or MDEs) reveals a desire in China to receive payments in their home currency. The results show that more than one third (36%) would prefer to be paid in CNY, with over 20 percent naming exporter convenience and reduced foreign exchange risk as the main drivers for that preference.
Despite this appetite, however, 42 percent of the surveyed companies never ask their overseas trading partners to pay in yuan due to perceived buyer reluctance. Companies in China largely attributed this reluctance to inconvenience (33%) and the seemingly difficult process experienced by partners in obtaining CNY for payment purposes (20%).
To account for the foreign exchange risk associated with settling in currencies other than CNY, one in five companies surveyed said they add fees of, on average, three percent of the total transaction cost.
"Chinese exporters would prefer that their trading partners pay in yuan, but most are afraid to ask because they think they will be rebuffed," said Mr. Nader. "There are easy and inexpensive ways for companies in the U.S. to settle transactions without using USD, which could generate increased goodwill and loyalty among their Chinese trading partners, not to mention cut the cost of doing business."
Another key finding of the survey is that companies in the U.S. are seen as far more unwilling to settle in CNY than those based in Europe. In fact, the U.S. was named as the most reluctant market (42%) with Europe (23%) and South East Asia (13%) placing second and third. Japan (8%) and Australia (2%) were seen as the least reluctant.
"Importers that are flexible and savvy in their approach to cross-border payments will find themselves well-placed to compete in today's global marketplace," added Mr. Nader. "Adapting to the on-going liberalization of the CNY is especially significant when one considers the growth opportunities that exist for companies that do business with China. The goodwill and supplier loyalty that would be created by American companies who offer to pay in yuan present a real opportunity for them to gain a competitive advantage when trading with the world's second largest economy."