Paying Chinese Businesses in US Dollars Cost US Businesses US$2.4bn in 2011
A survey of Chinese companies found that by settling transactions with Chinese exporters in US dollars instead of Chinese yuan (CNY) American businesses paid approximately US$2.4bn in fees to account for foreign exchange (FX) risk, reported Western Union Business Solutions.
“The US is the number one export destination for companies based in China,” said Alfred Nader, vice president of corporate strategy and development at Western Union Business Solutions. “To date, the vast majority of transactions between companies based in the US and China have been settled in US 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% naming exporter convenience and reduced FX risk as the main drivers for that preference.
Despite this appetite, however, 42% of those who would prefer to receive payments in CNY never ask their overseas trading partners to pay do so 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 FX risk associated with settling in currencies other than CNY, one in five companies surveyed said they add fees of, on average, 3% of the total transaction cost.
“Chinese exporters would prefer that their trading partners pay in CNY, but most are afraid to ask because they think they will be rebuffed,” said Nader. “There are easy and inexpensive ways for companies in the US to settle transactions without using US dollar, 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 US are seen as far more unwilling to settle in CNY than those based in Europe. In fact, the US was named as the most reluctant market (42%) with Europe (23%) and southeast 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 Nader. “Adapting to the ongoing liberalisation 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 US companies who offer to pay in CNY present a real opportunity for them to gain a competitive advantage when trading with the world’s second largest economy.”