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China exporters are trading their way to a more global yuan

[BEIJING] Faced with a currency now moving more freely in both directions, smaller-scale Chinese exporters are embracing hedging strategies and even ditching the dollar when it comes to writing invoices.

The yuan's surprise appreciation - more than 5 per cent in the first eight months of this year - put exporters in slim-margin industries in a tight spot. That was the case for the footwear unit of Anhui Light Industries International Co, whose range of loafers, slippers and ladies' sandals ends up in department stores in the US and Europe.

Now, the company plans to use more financial tools commonplace in developed markets, such as forward contracts that lock-in a price on a future date, explains Liu Haibo, a manager at the firm attending this month's Canton Fair in Guangzhou. They'll also do something desired by China's policy makers keen to extend their economic clout across the globe, and settle more orders in yuan instead of dollars.

"We would have a steadier flow of revenue," said Mr Liu, adding that the footwear department makes a 5 per cent to 7 per cent margin for selling shoes to the US, Europe and South America. "At least we don't need to endure the volatility." As the world's largest exporter moves toward an exchange rate more in line with supply and demand on currency markets, China may be escaping the old accusation - leveled by Donald Trump and others - that it has kept the yuan artificially weak. That in turn poses fresh challenges for companies trying to do business across the globe in their own means of exchange.

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"The more abundant yuan is overseas, the more often foreign firms will use it; the more often foreign firms use it, the more international yuan is," said Andy Ji, Singapore-based currency strategist at Commonwealth Bank of Australia, adding that currency hedging is usually too expensive for smaller firms. "Taking yuan payment is a cheaper way for Chinese companies to hedge currency risks. But whether they have access to it depends on the central bank." As economic expansion stabilized and China tightened up its capital controls this year in a period when the dollar was weakening, the yuan began to rise again after three years of declines. That surprised many exporters interviewed at the Canton Fair, prompting new demand for services including forwards, options and other derivatives.

Deng Linsong, director of Forest Fashions Co, which makes heavy-duty winter coats, says he sometimes borrows from a local bank in yuan using the payment on an order as collateral. When the buyer pays Mr Deng a few months later, the bank will settle the currency exchange itself, taking either a gain or loss from the fluctuations.

"Currency fluctuation is our biggest risk, and I hope the yuan stays as stable as possible," Mr Deng said.

The ultimate solution for him is directly collecting yuan rather than dollars. The coat maker is eager to expand into the southern hemisphere, whose winter orders will fill the void left by the summer in Europe and Asia. But swings of currencies in South America have dented Mr Deng's profits before. Now he says he is negotiating a deal with a South African buyer in yuan.

Trade in yuan can only exist where a ready supply is available, and that's not a given for a currency not yet fully convertible. The People's Bank of China has moved in that direction though, setting up some US$500 billion in swap lines with more than 30 countries from Suriname to New Zealand. The credit lines - a kind of foreign-currency overdraft for central banks - are intended to spur trade and promote financial stability.

Still, challenges loom for those who want to use yuan. Swift data show global transactions using yuan fell to 1.85 per cent in September, down from a record 2.79 per cent two years earlier. Customers are willing to pay in yuan if their local banks offer it, which is not the case every time, according to Anhui Light Industries' Liu. Tightening capital controls in the past two years have also undermined China's long quest to make yuan a global currency.

"Many corporates are still cautious after being surprised by prior bouts of yuan depreciation," Kelvin Lau, a senior economist for China at Standard Chartered Plc. in Hong Kong, wrote in a note. "It may take time for them to start responding to the recent unwinding of outflow curbs." Yuan-denominated goods trade accounted for 10.9 per cent of China's total goods trade in September, down from more than 30 per cent in mid-2015, the analysts wrote.

"It will take a long time for the world to accept a new currency, and the Chinese companies have to push the use of yuan to make it more prevalent," said Zhou Hao, an economist at Commerzbank AG in Singapore, adding that a depreciation may immediately prompt the exporters to embrace dollars again. "The yuan is not a mainstream currency yet, and it will not become one any time soon."