China faces yuan pressure as exporters' margins tighten and trade frictions risk rising

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China yuan and exporter pressure

Highlights

The yuan has risen nearly 5% against the dollar and 9% against the euro in 2023, prompting the People’s Bank of China to raise foreign currency reserve requirements to slow gains.
A Reuters analysis found the median net margin for 5,209 Chinese-listed companies was 4.9% in H1 2023, versus 8.9% for 9,733 global peers, with strategic sectors like EVs and semiconductors at just 2%.
Standard Bank estimates every 1% yuan appreciation cuts average export margins by 30 basis points, while Goldman Sachs forecasts the yuan rising to 6.40 per dollar in 12 months from 6.70.

Policy moves signal concern over yuan strength

As reported by Reuters, Chinese policymakers are increasingly uneasy that a rapid rise in the yuan could squeeze already thin margins for exporters, threaten jobs and weaken growth momentum. The People’s Bank of China said on Tuesday it would raise the foreign currency amount that financial institutions must keep as reserves, a step that signals concern over the currency’s recent strengthening.

The yuan has risen nearly 5% against the dollar and about 9% against the euro this year, according to the article. Analysts surveyed by Reuters largely expect gradual measures to slow those gains rather than any sharp change in exchange-rate policy. Options seen by the market include higher foreign-exchange reserve requirements, weaker daily fixings, looser rules for overseas investment and informal guidance to banks to help steer the yuan lower.

CMB analyst Ding Muqiao says there remains room for further adjustments if needed. Beijing is also likely to resist European calls for currency coordination similar to the 1985 Plaza Accord, as Chinese scholars and officials have long treated that episode as a warning about the economic risks of abrupt appreciation.

Exporters and strategic sectors face profit strain

Business owners in Zhejiang, Fujian and other export hubs say the firmer yuan is making their products less competitive abroad at a time when domestic overcapacity and price competition are already intense. Chen Lifeng of Ningbo Tengsheng Garments says the stronger currency has all but wiped out profits on dress exports to Europe, while executives in plastics, metal furniture and sanitaryware describe similar pressure on pricing and margins.

That stress is not limited to traditional low-value manufacturers. Zhu Ning of the Shanghai Advanced Institute of Finance says yuan appreciation disproportionately hurts labour-intensive exporters such as textiles and home appliances, but higher value-added industries also work on narrow margins as weak demand at home pushes producers to chase market share overseas.

A Reuters analysis of 5,209 Chinese-listed companies with market values of at least $100 million found their median net margin in the first half of the year was 4.9%, versus 8.9% for 9,733 global peers. A separate Natixis study put margins in electric vehicles, batteries, solar and wind equipment and semiconductors at just 2%, underscoring how sectors central to China’s future growth strategy remain vulnerable to exchange-rate moves.

Standard Bank estimates that every 1% appreciation in the yuan’s real effective exchange rate cuts average export margins by about 30 basis points. Goldman Sachs expects the currency to strengthen to 6.40 per dollar over the next 12 months from about 6.70 currently, a trajectory that could add to pressure on employment, consumption and trade relations as foreign governments continue to argue the yuan remains undervalued.

Our earlier coverage of China’s expected third-quarter growth pickup explained that fresh policy support—such as targeted rate cuts, mortgage subsidies and the use of unused local-government debt quotas—was aimed at keeping GDP growth near the lower end of Beijing’s annual target. It also noted that strong exports and factory output were offsetting weak domestic demand amid ongoing property-sector stress, leaving policymakers under pressure to sustain growth while trade tensions linger.

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