Exchange rates are a rising concern

3 August 2005
More news

04 August 2005

China has revalued its currency, which will push the cost of its exports up. Anusha Bradley assesses the long-term effects on procurement

The UK spent $13.48 billion (£7.67 billion) on Chinese imports in 2004, according to the China Britain Business Council (CBBC).

So when China announced a currency revaluation on 22 July, alarm bells began to ring over the pricing effect it would have on the country's exports.

While the move was interpreted primarily as a way of redressing the huge trade surplus China has with the US, the suggestion was also that the resulting rise in the yuan's value was just the first step towards greater liberalisation of the currency.

The 2 per cent revaluation is expected to have little immediate impact on imports to the UK, but purchasers sourcing from the Far East can expect further steps in this direction. And they should start to plan for them now.

David Woo, head of foreign exchange strategy at Barclays Capital, believes revaluations of another 2-3 per cent are likely in the next 12 months.

And US-based business analyst AMR Research predicts the costs of imported Chinese goods could rise by up to 30 per over five years. Although it adds this is unlikely until the yuan (also known as the renminbi) is revalued by at least another 8 per cent.

The good news from economic forecasters is that further revaluations are likely to be slow and steady. A slow change will allow buyers to continue to enjoy the huge cost advantage China offers for some years to come.

Some Western companies have already drawn up contingency plans. Chris Lovatt, head of strategic sourcing at Boots, said it would try to mitigate any price increases by encouraging suppliers to save costs by making efficiencies.

Paul Hampton, director of product marketing at procurement consultancy Ariba, said price uncertainties mean purchasers will be monitoring China more closely and should take measures to guard against the negative impact of any further changes.

"That's when you need to have a contingency plan, splitting your supply base, whether locally or in other countries to which you can move production," he said.

Hampton added that currency risks might now feature more prominently in a list of buyers' key concerns with low-cost country sourcing. A survey in June of 200 procurement chiefs by Ariba and the European Business School's Supply Institute revealed political instability was the number one risk. Price increases and exchange rate risks were rated second and fourth respectively.

If Ariba ran the survey again, said Hampton, currency dangers may well rank more highly.

Lance Younger, head of the company's strategic consulting function for Europe, the Middle East and Africa, said it was now particularly important to have currency-tracking clauses in contracts that enable buyers to get out of deals if fluctuations start to damage their business.

Younger said purchasers should seize this chance to forge closer links with finance departments to counteract exchange risks and help raise the profile of procurement's role.

Others view China's currency change in a positive light for both the country and buyers.

John Hatton, corporate development director at e-sourcing company TradingPartners, said: "This can only serve to enhance confidence in China as an attractive source for manufactured goods."

It should also stifle calls in the US and Europe for greater protectionism, he added. This would ease buyers' fears of trade barriers springing up that could make Chinese suppliers less attractive.

Kevin O'Marah, vice-president of research at AMR Research, said the country would remain a cost-effective source for buyers if they started work now to eliminate other risks such as lengthy lead times, intellectual property and managerial oversight issues.

Hatton added: "Far East sources are now offering UK buyers real quality. The Chinese revaluation will be viewed in the context of sound, multi-dimensional sourcing decisions. It is not just about pricing."

SMaug2005

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