The Burbank Tribune (Grandpa White's newspaper in the 1920's)

China businesses hoard US dollars. What will be the consequences? | July 27, 2012

I’m not sure exactly what this means.. I know that over the decades I have seen different cultures that have come to America, send money back to their country for friends and relatives.. People from Mexico, South America, Asian countries, even Pakistani’s, that included with all the foreign aid probably reduces the number of US dollars we have in our borders. I have watched it more and more the past few years. They way the government probably answers that is to ‘print’ more dollars via the Federal Reserve.. Printing dollars in the Federal Reserve causes inflation and hyper-inflation.. I am reminded of certain real estate people in the 1980’s that created something called, “Creative Financing” which probably got us into some of the trouble we are in ‘today’! I am wondering if the economists of the last 30 to 40 years have gotten us into this mess with monetary policy and their ‘creative financing’ with the Federal Reserve. Our money used to say on it things like ‘Silver Certificate’. Are we in for real trouble?
                                                                     Unknown, Lansing
THE ECONOMIC OBSERVOR, CHINA
Chinese Exporters Hoard US dollars.
Summary:When China’s largest shoe manufacturer gets paid, it’s often in dollars – and now, for the first time in years, it’s banking those payments without converting them into yuan.
By Hu Rongping, Wang Fang, Wu Weiting, Chen Huijing and Yang Yang (胡蓉萍, 王芳, 吴娓婷, 陈慧晶, 杨阳)
Issue 577, July 9, 2012
News, cover
Translated by Zhu Na
Original article: [Chinese]
When China’s largest shoe manufacturer gets paid, it’s often in dollars – and now, for the first time in years, it’s banking those payments in the U.S currency rather than converting them into yuan.
Like other businesses that witnessed the yuan’s seven-year ascent against the greenback, Aokang Shoes Co., Ltd (奥康鞋业股份有限公司), used to switch dollars into yuan on the day the cash came in, but this year’s economic uncertainty means that the yuan/dollar trade is no longer a be a one-way bet, and corporate treasurers are rethinking their policies.
“We’ve tried to keep every dollar payment that we get [in dollars],” said Aokang’s head of international trade Li Haijun (李海军), who oversees annual exports of 4 million pairs of shoes.
Another manager at the Zhejiang-based firm, Guo Yong (郭勇), says that he’s monitoring U.S. news for clues of movements in the yuan/dollar rate, while the company’s vice president, Xu Xiaojie (徐晓杰), tracks the rate with daily text messages.
At the end of March, the yuan closed at 6.2943 against the dollar. The Chinese currency was only 0.66 percent stronger than on Jan. 1, and it actually fell against the greenback in half of the 58 trading sessions during that three-month period.
Another company that’s changed its treasury policies in response to the changed prognosis for the yuan is Dongguan Kampin Metal Industrial Ltd (东莞金边金属实业有限公司).
“Two years ago when the yuan was appreciating, we would convert dollars, yen and euros as soon as we received them. But, recently we have started to keep them, and then later decided how much to convert depending on our day-to-day expenses,” said the company’s managing director Liu Dabang (刘达邦).
When the yuan was appreciating, Chinese importers tended to pay with borrowed dollars rather than swapping yuan to get the dollars. This way, they could keep their yuan on deposit and profit as the dollar’s depriciation reduced the effective cost of their debt.
Now, fewer and fewer Chinese companies are shorting the dollar and some companies are also choosing to keep their dollars overseas, as is clear from the lower settlement volumes in the offshore market.
Hong Kong’s yuan deposits in April declined to 552 billion yuan, down 0.4 percent from March, marking the fifth consecutive month of falls. In the same month, the volume of yuan remitted in cross-border trade settlement was 177.1 billion yuan, down from 227.3 billion yuan.
The change in policy at Aokang and Kampin actually began in the fourth quarter of 2011, when the yuan came under pressure as global investors piled into the dollar and other safe heaven assets.
In that period, the value of China’s foreign reserves fell for the first time since 1998, mainly due to the hot money leaving the country.
Since then, Kampin company has raised the proportion of payments that it keeps in dollars to 10 percent, 20 percent, and now 40 percent.
This mirrors the policies of other Chinese firms – according to the central bank’s fourth quarter policy report, foreign currency deposits late last year stood at $275.1 billion, a year-on-year increase of 19 percent. They grew by a further $66.8 billion in the first quarter of 2012.
The bank’s report suggested that businesses were responding to changes in the expected exchange rate. Subsequent interest rate cuts have strengthened the case for holding dollars and contributed to the yuan’s 0.48 percent depreciation against the dollar in the second quarter.
Chinese exporters’ reticence to convert dollar payments into yuan deposits may have harmed the economy by reducing the flow of these funds into the real economy.
The central bank, which last week cut interest rates for the second time since late 2008, has said that Chinese companies hoarding of dollars is a driver for its monetary policy.
When the bank cut reserve requirement in March, Governor Zhou Xiaochuan (周小川) cited Chinese businesses’ stashes of dollars.
The clearest impact of the central bank’s monetary loosening this year has been to reduce the spread between the yuan and the dollar depoists, making it more attractive to hold the American currency.
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