American companies exporting goods to china have a good reason for optimism with the recent announcement that China will allow its currency, the yuan, to float more freely against the US dollar. Supply Chain Solutions caught up with Martha Gabrielse, treasurer at the Michigan District Export Council West, and VP of Global Trade and JP Morgan Chase, for converstation about the how's and whys of China's new currency policy and will mean for both importers and exporters.

SCS: Can you explain in layman's terms 'floating' the yuan?
MG:Currencies for which the exchange rate is allowed to freely move with international currency markets are considered floating.  Since 2008, the Yuan has
been pegged to the US$ at an effective exchange rate of about 6.83 Yuan per US$.  Recently, China's central bank announced that they were going to make this
tightly controlled policy more flexible.  That does not mean that the Yuan is going to become a freely floating currency, but it does seem to indicate that China is
open to an adjustment in the exchange rate - although they clearly ruled out any big rise in the Yuan.

SCS: Who will benefit most from this policy?
Most every economist you would talk with would assert that the Yuan is undervalued at its current pegged exchanged rate.  This leads to the assumption that
once it does adjust, the Yuan will strengthen.  When a currency strengthens, that means it takes less of that currency to purchase other currencies. 
Therefore, if the Yuan strengthens, then it will take fewer Yuan to purchase currencies such as the US$ and EURO.  Therefore, those who sell goods to China
and those who sell goods that compete with Chinese goods would benefit.

SCS: Are there any disadvantages?
MG: More so caution v. disadvantage.  Whenever a currency moves from fixed to floating, it's best to not see big % swings in the exchange rate for that currency.
Gradual adjustments are much more easily absorbed and handled by the global markets and economies.  Most economists do feel that we will not see a radicalchange in the Yuan exchange rate, and China's central bank officials clearly ruled out any big rise in the Yuan.

SCS: Will the policy affect importers and exporters differently?
MG: As a general rule, when the currency of the buyer's country strengthens, that is good for exporters – because that means it will take less of the buyer's currency to purchase the seller's currency to pay for goods.  You could say that the opposite holds true for importers.  That is, if the importer is purchasing from a Chinese supplier and the Yuan strengthens, then it will take more of the importer's currency to purchase Yuan and pay their supplier for goods.

SCS:Are there any resources for organizations looking to capitalize on the new policy?
MG: You should stay close to your Foreign Exchange officer at your bank, your International Tax accountant, and with the US Department of Commerce – International Trade Administration.  When the policies of a major trading partner change, you definitely want to be armed with the tools and knowledge to address the change from financial andpolicy aspects.  Discuss and explore hedging strategies with your Foreign Exchange officer (such as non-deliverable forward contracts to hedge the Yuan).  Check in with your tax accountant to see if there are any possible implications to your tax planning strategy (especially if you have any operations in China).  Exporters should confer with their US Export Assistance Center - a wonderful service of our US Department of Commerce International Trade Administration.

In West Michigan, they can call 616-458-3564 and speak with Tom Maguire or Kendra Kuo.  Outside of West Michigan, it's easy to find your US Export Assistance Center at www.export.gov/eac/ .  Importers  should work with their local US Customs office, best found at http://www.cbp.gov/xp/cgov/toolbox/contacts/.

You may also contact John Toles VP of Global Trade at Supply Chain Solutions and member of the Michigan District Export Council. Supply Chain Solutions is a Foreign Freight forwarder, US Customs Broker, and licensed by the Department of Transportation for domestic freight services.