U.S. Companies Waste $2.4B by Trading in Dollars, Not Yuan

By FOXBusiness

Even though the U.S. imports more goods from China -- nearly $400 billion each year -- than anywhere, there still appear to be some costly cultural misunderstandings that may be hurting bottom lines on both sides.

According to a new study by Western Union (NYSE:WU), Chinese exporters prefer to get paid by U.S. companies in the local renminbi instead of the U.S. dollar, but don’t want to ask for fear of offending their delicate trade relationship.

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However, U.S. companies that import from China are being charged an average 3% surcharge for continuing to settle their bills in the greenback, translating to $2.4 billion in unnecessary forex fees every year, the report said.

“These are old habits that need to die,” said Alfred Nader, vice president of corporate strategy and development in North America for Western Union Business Solutions. “Almost anything on your desk is made in China. If you think about these American importers being able to save 3% simply by paying in the renminbi, they can use those savings to invest domestically.”

Win/Win Situation

The irony is that it seems like this simple switch in business practices would end up creating a win for both importers and exporters.

For U.S. companies, paying in renminbi is typically faster and cheaper, Nader said. That’s because money transfers need to only go through one bank rather than the two in dollar transactions, creating a 50% improvement in speed.

On the other hand, Chinese companies want to be paid in yuan, which is the base version of the renminbi. Yet China’s central bank, the People’s Bank of China, only made this possible to exporters and trading partners last year as it continued to internationalize the currency.

Out of a survey of 1,000 Chinese companies who are permitted to settle trades in the yuan, 36% would prefer to be paid in that local currency, due at least in part to convenience and lower risk than dealing with other currencies like the euro or dollar, Western Union said.

Chinese companies have understandably expressed concern about the relative devaluation of the U.S. dollar in recent years compared with the increased value of their local currency amid the economic boom there.

For example, the U.S. dollar has lost almost 20% of its value against the yuan since February 2007. Today one yuan is worth about 12.9 cents, compared with 15.9 cents previously.

Rocking the Boat?

Despite these concerns, 42% of those respondents said they have never actually asked their overseas trading partners to make the switch due to “perceived buyer reluctance,” the report said.

One respondent to the survey, which was conducted anonymously, said, “Customer[s] refuse to pay in RMB because they are used to paying in USD. So why do they need to change the routine?”

“Perhaps they wish to not rock the boat; they don’t want to upset a longstanding business relationship,” said Nader. “They’ve been doing business one way for 40 years so these habits are difficult to change overnight.”

Western Union said 91% of qualified Chinese exporters have said they have not seen an increase in renminbi payments since the government lifted restrictions on the currency in 2009.

In an effort to protect themselves against an exchange rate fluctuation that might eat into their profit margins, one in five exporters admitted to adding an average surcharge of 3%, often without the knowledge of their trading partners.

Western Union came up with its $2.4 billion estimate by plugging the 3% fee into one-fifth of the $399 billion in goods that the U.S. imported from China last year based on Census Bureau figures.

“We need the American businesses to take that first step knowing it would be well received,” said Nader.

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