SAFE relaxed rules on mandatory foreign currency conversion to the yuan this year, mainly to stem growth of forex reserves. But the appreciating yuan means fewer suppliers are likely to take advantage.
China exporters have welcomed the central government's decision allowing them to keep US dollars in overseas accounts instead of converting them into yuan. But with small and midsize makers dominating the country's export landscape, very few are able to take advantage immediately.
Liang Qinqin, salesperson at Ningbo-based Zhejiang Tailong Commercial Bank, said the policy could help reduce currency exchange risks for exporters. Unlike before when suppliers were required to convert their dollars into the yuan, now they can choose a more favorable time to exchange their money, or not at all. Companies that need dollars to pay for materials and components, for instance, can just keep the foreign currency in their overseas account. Previously, they would have to convert their dollars into the yuan and then back into dollars when needed. In the process, suppliers lost about 25,000 yuan ($3,798) for every $1 million that had to be changed to the yuan and back.
Chang Dong, international business division president of the Konka Group, said opening an overseas dollar account is helpful since the consumer electronics company has several subsidiaries in various countries. Interest rates are higher as well.
But Liang admitted that with the yuan's continued appreciation, some companies may not want to take advantage of this policy and choose to convert their dollars into the local currency instead.
Among these suppliers is Ningbo Aux Imp & Exp Co. Ltd. Export sales manager Chen Hongyu said exchanging dollars for the yuan makes more business sense now.
Further, small makers see little benefit to their export business. Most of them need to convert their dollars anyway since they need the yuan for their day-to-day operations, including paying workers' salaries.
For better implementation, some local governments are organizing seminars and talks to educate suppliers about the new policy. Only companies with no record of major violations of foreign exchange regulations for the past two years are eligible.
SAFE (China's State Administration of Foreign Exchange) allowed companies to keep their foreign currency income in overseas bank accounts beginning Jan. 1, 2011. This came after a trial run, which started on Oct. 1, 2010 in Beijing, and the provinces of Guangdong, Shandong and Jiangsu. These four areas were chosen because China customs statistics showed they accounted for nearly two-thirds of the country's total export sales. Among the major industries are textiles, machinery, energy and steel.
SAFE generally does not open a regulation for national implementation only after a short trial period. It did so because of heightened clamor from the export manufacturing sector. But there are other reasons as well.
Allowing companies to keep their dollars overseas can help slow growth of—and may even reduce—China's foreign exchange reserves. The People's Bank of China said the country's reserves grew 18.7 percent year on year, exceeding $2.8 trillion in 2010. But inflation and the yuan's appreciation are pressuring the government to stem the rapid growth of reserves.
SAFE is planning to improve the foreign exchange administration system in the next five years and gradually ease the limitation of cross-border capital transactions. Permitting exporters to set up overseas bank accounts is one of the major steps.
Improving trade facilitation is another reason the mandatory foreign exchange conversion was lifted. In the past, manufacturers had to register with the local foreign exchange administration for dollar earnings to be remitted to their domestic accounts. The process normally takes three days. Now, suppliers can deposit dollar payments directly into their overseas accounts and use the money whenever needed.
The policy could also encourage more SOEs and privately owned companies to expand their business overseas.
Note: This article "New policy allows China exporters to keep their dollars" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.
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