Western Union Business Solutions, a business unit of the Western Union Company (NYSE:WU), a leader in global payment services, has found that by settling transactions with Chinese exporters in U.S. dollars (USD) instead of Chinese yuan (CNY) American businesses paid approximately USD$2.4 billion in fees to account for foreign exchange risk.
“The U.S. is the number one export destination for companies based in China,” said Alfred Nader, Vice President of Corporate Strategy & Development at Western Union Business Solutions.
“To date, the vast majority of transactions between companies based in the U.S. and China have been settled in U.S. 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 foreign exchange 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 in yuan 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 foreign exchange 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 yuan, but most are afraid to ask because they think they will be rebuffed,” Nader said.
Another key finding of the survey is that companies in the U.S. are seen as far more unwilling to settle in CNY than those based in Europe. In fact, the U.S. was named as the most reluctant market (42%) with Europe (23%) and South East 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.
He said 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.
Paying suppliers in CNY would help American businesses gain a competitive advantage when trading with the world’s second largest economy, he added. Source: Eon Business Online
