Small and medium sized enterprises are the lifeblood of UAE business and, without a doubt, it’s been a tough 18 months across many industries. Lower trading activity in 2020 reduced demand at SMEs that import goods; then when conditions improved, shipping rates and raw material costs both rose substantially.
As trading activity normalises, SMEs can again widen their network of suppliers. China of course will continue to be a key source of supplies. But with a renewal and expansion of trade flows, it’s important for SMEs to refresh how they trade so as to establish the most favourable terms and keep a lid on costs.
How to pay
One major development has been the emergence of China’s currency. Easing monetary regulation and a drive to internationalise has led to renminbi swiftly increasing in global trade settlements. It was the third most internationalised money by the end of 2020, according to the International Monetary Institute at the Renmin University of China. Around 3.6 trillion renminbi (Dh2.066 trillion) worth of trade was settled in the first-half of this year.
This has often been at the expense of settling payment in US dollars. Indeed, as of July, all trade between China and Indonesia will be settled only in each other’s currencies. Chinese exporters are incentivised too: exporters receiving CNH (the internationally-traded renminbi) can apply for a tax rebate as they could with dollars.
What does this all matter to the UAE’s businesses? Chinese companies traditionally price and invoice their exports in dollars, since renminbi wasn’t widely traded and there was a general demand for foreign currency reserves. This of course continues to happen today. On the face of it, it’s convenient to UAE companies to pay in the currency to which the dirham is pegged.
But this ignores two key pressures on Chinese manufacturers in the last year that is pushing up the price of dollar-based exports and hitting UAE importers in the pocket. The first is the exchange rate. As the world grappled with lockdown, China’s rebounding economy saw renminbi strengthen more than 11 per cent against the dollar. Near the end of October, the greenback hit a four month low of around 6.375.
This means that a dollar payment received by a Chinese exporter today is worth a lot less when converted into their strengthening currency than a year ago. Sixty- or 90-day periods of sales credit before receiving payment leaves them further exposed. The second is the rise in price of raw materials and energy. Higher input prices can only be absorbed for so long before they’re passed on to the customer.
The effect of these should be obvious: raising US dollar-priced goods to compensate. I’ve spoken with countless importers who have seen such increases. Some have also received requests to pay in renminbi. Where some SME have yet to see the effects, the magnitude of the exchange rate and input prices makes it a matter of time. Despite the dollar-dirham peg, UAE buyers are indirectly exposed to the exchange rate pressures of their suppliers to pay more dollars for the same goods.
Come up with a solution
UAE companies that can pay in China’s local currency, however, can create a win-win situation, and strengthen their negotiating hand. Requesting an invoice in renminbi allows the buyer to get a better idea of the price of the goods compared to the price-buffer inflation in dollars. Everyone wants to be sold to as a ‘local’.
For the exporter, receiving renminbi means receiving the currency in which they run their business, removes the exchange cost applied by their local bank, with a tax rebate to boot. If they don’t offer a discount on the goods, it’s worth negotiating for it.
And while dollar and CNH may be not pegged, UAE clients of Ebury have been receptive to being able to hedge a rate of exchange over a period of time, so when the day comes to pay in the currency, they know exactly the cost in dirham of making that payment. It’s another good example of making a change to jump from surviving to thriving as business conditions improve.
