![\"historical](\"http:\/\/dpfireworks.com\/blog\/wp-content\/uploads\/2014\/03\/historical-rmb-chart.jpg\")
<\/a>From 1960 – 1985 the rate moved between 1-2 RMB per dollar.\u00a0 So, this was an “expensive period for fireworks importers” but it was also before China privatized fireworks companies and thus prices were not really reflective of actual costs.\u00a0 From 1985 to 1993 China began the process of privatizing state owned factories.\u00a0 To give these factories some help, China depreciated its currency thus allowing factories to sell at a lower USD cost.<\/p>\nFrom 1993 to 2006 is what I call the golden age of fireworks<\/a>, the currency was stable at about 8 RMB per USD.<\/p>\n This strong currency made fireworks comparatively cheap.\u00a0 This stimulated the export market for items like toys, fireworks, and hundreds of other simple products.\u00a0\u00a0 China’s export factories expanded rapidly.\u00a0 For fireworks, originally there were only a handful of government run factories in Liuyang (maybe less then 50).\u00a0\u00a0 By the end of the golden age in 2006 there were hundreds if not thousands.<\/p>\n By 2006 China was prospering.\u00a0 Demand for its manufactured goods had been raising for many years and factory owners had accumulated significant wealth.\u00a0 Inflation inside China for labor and food began to raise quickly.\u00a0 The government decided that it wanted to slow down the overheating export sector and try to encourage “high tech” manufacturing and domestic consumption instead.\u00a0\u00a0 Starting in 2005 and ending in 2008 the RMB was allowed to appreciate by over 20%. (the first dip in the chart above)\u00a0 This effectively made fireworks more expensive.\u00a0\u00a0 What is more is that a Tax rebate, which was given to exporters of Fireworks, was also removed in 2006.\u00a0\u00a0 This further increased the cost of fireworks for importers.<\/p>\n However, the real story in 2008 was not really the tax credit or the RMB.\u00a0 These were small potatoes compared to the stimulus program that China implemented.\u00a0\u00a0 Just as the USA implemented government bail-outs of banks and auto companies, and printed more money in the form of QE, China also had its own form of QE.\u00a0 Amazingly, even though the USA has invested trillions in stimulus (printing money) since 2008.\u00a0 China has actually injected even more stimulus than even the USA.<\/p>\n Most of the USA’s newly printed money seems to have flowed to the upper 1% and the stock market.\u00a0 In China, all this extra money also seems to have flowed to the “insiders”.\u00a0\u00a0 Rather then taking that money and putting it into the stock market which is not trusted in China, the “insiders” have been building real estate.\u00a0\u00a0 The common people of China have long been famous as savers.\u00a0\u00a0 Somehow, even people who would seem to be meager workers can accumulate significant wealth over a lifetime.\u00a0 It is not uncommon for even common families in China to have saved hundreds of thousands or even a million of USD over the course of a lifetime.\u00a0\u00a0 With low costs of food & medical, zero effective taxes, no distractions for buying junk (most products manufactured in China were not available for sale), you can start to understand how a family who only earned a small wage could still save a lot of money over time.<\/p>\n Part of any stimulus is to set interest rates low.\u00a0 This encourages bank lending but it punishes household savings.\u00a0\u00a0 Thus, Chinese households have been looking for a place to invest their money.\u00a0 They are not allowed to legally invest their money outside of China. \u00a0 They don’t trust the Chinese stock market.\u00a0 Therefore, all these Chinese households began to withdraw their money from banks and have been investing in real estate.\u00a0\u00a0\u00a0 As property prices have risen, this has just fueled the buying spree as people think they better get a home now or next year they will not be able to afford one.\u00a0\u00a0 Thus, a classic real estate bubble has been created in China.\u00a0\u00a0 There are talk of “ghost cities” and “empty apartments”.\u00a0\u00a0 This is true.\u00a0 Families will often purchase an apartment and plan to just leave it empty for their children who might move into it in 10 years time.<\/p>\n The bottom line is that the Government printed money. \u00a0\u00a0 Then connected individuals received loans from banks to build apartment complexes and shopping centers.\u00a0\u00a0 In the fireworks industry, many of the “fireworks factories” used this opportunity to diversify and built apartment buildings using their connections in the local government.\u00a0\u00a0\u00a0 From 2008 – 2013 this strategy seemed to be paying off well as property developers have been able to sell the apartments, and pay off the loans.<\/p>\n However, recently there is talk that some companies are starting to run into trouble and therefore can’t pay off their loans they took to build the real estate.\u00a0\u00a0 How the Chinese government will handle these “defaults” is yet to be seen.\u00a0\u00a0 They may allow these companies to go out of\u00a0 business.\u00a0 Which could mean many of the Chinese Fireworks factories who have been playing dangerously in the real estate market could also go out of business, raise prices, demand payment in advance, etc.<\/p>\n This failed hotel in Liuyang has gone through two owners since opening:<\/p>\n <\/p>\n This brings us to the recent depreciation.<\/p>\n Most of you have probably now heard the RMB has recently reversed its decade long trend of appreciation (which increases costs for fireworks importers) and has started to depreciate (making fireworks cheaper for importers).<\/p>\n This also seems to make sense with the argument that China is starting to see issues with slow downs and thus is depreciating the currency to stimulate the economy.<\/p>\n The many news reports have headlines such as “China enters currency wars” or “China real estate bubble bursting” or “China credit defaults beginning”.<\/p>\n There are two possible outcomes for the next 12 months with the China currency.<\/p>\n The consensus, and what China’s leader has stated, is that the current depreciation is just temporary and that long term the RMB will continue its decade long trend of appreciation (making fireworks more expensive in 2015).\u00a0\u00a0 Rather than to reward China’s fireworks factories, the real reason that China has allowed depreciation this month is to try to punish currency speculators and stop the flow of “hot money” into China.<\/p>\n The long term appreciation of the RMB became a target for currency speculators who realized it was a no-lose bet the last several years.\u00a0 They utilized such exotic financial tools such as derivatives called target-redemption forwards.\u00a0 These make money for the buyer as long as the RMB appreciates, but if it depreciates then the buyer faces large losses.\u00a0\u00a0 Most current TRF’s face looses at a red line of 6.2 rmb\/usd.\u00a0 Interesting the currency has hit 6.2 and maintained this level for the past week.\u00a0 Thus after three years of “easy money” the buyers of these instruments are now losing money.\u00a0 Another winning bet in the last few years has been what is referred to as the carry trade.\u00a0\u00a0 Here investors use commodities such as copper, steel, gold, and soybeans to borrow at low interest rates, and earn money off of the RMB appreciation and interest rate spread with-out ever really intending to use or sell the underlying commodity.\u00a0 These type of financial games do not produce any real value for the economy, it makes the rich richer, it fuels inflation, and it punishes the common person.<\/p>\n It appears that China’s government recognizes this and to prevent households from getting angry and creating civil unrest, the government seems to have temporarily depreciated the RMB to punish the carry trade and one-way FX bets.<\/p>\n The coincidence of the recent depreciation and the increase of the daily trading band from 1% to 2% is not directly linked.\u00a0 Some assume that the change in the daily trading band is what caused the depreciation.\u00a0 This is not true.\u00a0 China’s government still fully controls the RMB exchange rate.\u00a0 So the daily trading band has nothing to do with the actual rate, other then a larger band means the government can change the currency even faster.<\/p>\n In summary,\u00a0 although it would be nice to think that we are going back to golden age of importing with the rmb at 8.2 to 1 usd, it is very unlikely this will happen. \u00a0\u00a0 Significant depreciation of the RMB will cause imported energy & food prices to raise significantly and would most likely cause property prices to dramatically fall. \u00a0 Food and energy inflation is China’s biggest fear as that will cause wide spread anger.\u00a0 High property prices actually are seen as a positive for Chinese because it keeps their investment value high.<\/p>\n As long as China’s economy continues on at current levels with-out a major recession, then the RMB is likely to appreciate back to 6.15 or 6.0 in the coming year.\u00a0\u00a0 If the economy is worse then it appears or is getting worse, then the RMB will stay at 6.2 or depreciate even further.\u00a0\u00a0 The good news for the USA market is that we have the summer to see where rates are going.\u00a0 Dunpai usually sets its annual exchange in July of each year.\u00a0\u00a0 We should have a much better picture by May or June.<\/p>\n Regarding FX, the bottom line is that your best bet is to always pay for your goods (and thus remove any FX risk) as soon as you have the cash available. \u00a0 Some of you may be thinking that\u00a0 if you postpone payment for another month or two, the RMB might depreciate further and thus you save more money.\u00a0 However, there is an equal chance that the RMB might return back to 6.15 next week.\u00a0\u00a0 So, as in any gambling, right now you are “in the money”.\u00a0\u00a0 Therefore, your best bet is that if you have the cash, make your payment right now and take advantage of the 6.15 to 6.2 RMB gain.\u00a0\u00a0 If you wait hoping for your gain to increase, you might find that it has turned into a loss.<\/p>\n Regarding bank solutions called hedges.\u00a0 The bottom line is that a hedge is an insurance policy.\u00a0\u00a0 Banks and Insurance companies are there to make money.\u00a0 They will never lose money.\u00a0 Therefore, typically hedges turn out to be a higher cost then if you would have just paid directly.\u00a0\u00a0 Hedges, as insurance, are costs that are designed to address a catastrophic event in your business.\u00a0 With fireworks, when you have an accident, your business is effected, not the whole industry.\u00a0 Therefore, insurance makes sense.\u00a0\u00a0 However, for FX, if there were a major FX change, the entire industry will be effected, in fact all industries dealing with China will be impacted.\u00a0\u00a0 Therefore, taking out an FX insurance policy or hedge probably will not help you much if the entire USA and China economy is effected.<\/p>\n Bottom line:<\/p>\n 1.) Be very careful of bank claims regarding FX.\u00a0 Those who bought hedges thinking they could not lose money are now losing. \u00a0 Most bankers probably don’t even fully understand the financial instruments they are trying to sell you.<\/p>\n 2.) For FX, the best policy is to pay as soon as you have the money available.\u00a0 This eliminates your risk.\u00a0 Trying to time your payments\u00a0 to take advantage of FX can very likely backfire.\u00a0 You are in the money right now as our quotes were at 6.15 and we are now billing at 6.2.\u00a0 So if you have the cash, paying now will lock in your savings.\u00a0 Waiting, could potentially cause a loss if the RMB reverts to appreciation.<\/p>\n 3.) The RMB is likely to appreciate back to 6.15 or lower by the 2015 buying season.\u00a0\u00a0 We will know more by May or June.\u00a0\u00a0 Keep an eye on China’s real economy (not as reported on the USA news).\u00a0 A significant slowdown in manufacturing or a significant sell-off in real estate will likely result in depreciation.\u00a0 So far, neither appear to be happening.\u00a0 \u00a0 Anything otherwise will result in a resumed long term trend of appreciation (with increased daily volatility to discourage speculation).<\/p>\n Written by Dun Pai Fireworks Group, http:\/\/www.dpfireworks.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Written by Dun Pai Fireworks Group Recently some of our customers have been approached by their banks with “programs” supposedly designed to “protect” them from the USD to RMB Foreign Exchange (FX) Risk. With the Chinese currency in the news … Continue reading <\/a>In 2008 the USA and other major economic players suffered a “financial crisis”.\u00a0\u00a0 The Chinese seeing the potential that USA buyers might not be able to afford the higher prices reversed course in 2008 and re-instituted the Export Tax credit and stabilized the RMB appreciation.\u00a0 Dun Pai actually lowered prices by about 5% that year passing on these measures to our customers in an attempt to maintain our volume.<\/p>\n<\/a><\/p>\n<\/a><\/p>\n<\/a><\/p>\n<\/a>However, I caution that many of these “headlines” are probably more attention grabbers than 100% true.\u00a0\u00a0 So far, here on the ground in China, there are no real signs of the real estate bubble bursting.\u00a0\u00a0 There was a report of “one” credit default among thousands outstanding.\u00a0\u00a0 So, much of the headlines at this point are just hype.<\/p>\n<\/a>One is that China really is entering a currency war and it has depreciated the currency with the goal of boosting its export sector.\u00a0\u00a0 This would be good news for fireworks importers in 2015, however, I caution that this is NOT the consensus of most major economists and professionals.<\/p>\n<\/a><\/p>\n<\/a><\/p>\n