Chinese exporters ditch wounded euro for dollars

Chinese exporters who made a big push only a year ago to bill in euros are increasingly turning their backs on the wounded European currency and demanding dollars instead.

By contrst, Beijing last week said a report it was reviewing the euro portion in its mountain of foreign exchange reserves was groundless and it calmed markets by saying that Europe remained a key investment market.

But Chinese exporters and the local governments that oversee them are less confident. They are trying to keep a wider berth from the euro, at least for now.

Hangzhou Natutex Apparel Corp, a producer of special fabric for outdoor use, ships nearly all of its 10 million yuan ($1.5 million) in annual exports to Europe.

Last year, when the European economy looked to be on solid footing, it settled 50 percent of sales in the euro. It has cut that back to just 5 percent this year.

"The reason is obvious. You have to be alert about exchange rates in the foreign trade business," Yu Yueping, Natutex chairman, said. "It would be too bad if your hard-earned profits were eroded by exchange rate changes."

The euro has tumbled 17 percent against the yuan EURCNY="R" in 2010 as the Chinese currency has been locked in place against a strengthening dollar.

SHORT-TERM CONTRACTS

Local governments are also telling exporters to be cautious about settling trade in the European currency.

Trade officials in Jiangsu, a prosperous manufacturing province, told exporters to sign short-term contracts when dealing with European clients and to cut back on euro-based settlements, the Jiangsu Business News reported.

"Considering the euro's uncertain future, exports to European countries should be settled in yuan if possible. If the buyers do not agree on yuan settlement, then use the dollar," it said.

More than 80 percent of total Chinese exports are paid for in dollars, according to local reports. The government had been trying to change that, to encourage more euro settlement as part of a broader effort to diversify its foreign exchange reserves.

It had seemed a smart -- and easy -- path to diversification. Not only do euro bond markets offer the only real rival to the depth and liquidity of U.S. debt markets, but the European Union is China's biggest export destination, meaning lots of cash flows from Europe to China every year.

Times have changed.

Shishi Daily, official newspaper of an export base in coastal Fujian province, reported cheerfully last week that its exporters were doing well after heeding warnings to shun the euro.

"Exporters in Shishi were told by officials via our newspaper: Don't use the euro, use yuan or the dollar! Many exporters accepted this suggestion, so even as the euro has kept falling, exporters in Shishi have not reported heavy losses," it said.

HOW TO MAKE A SAUSAGE

Peng Hu's sausage empire in northwestern China has been less successful.

His firm, Xinjiang Huarui Casing Products, every year exports about 50 million yuan worth of the material that encases sausage fillings to Europe, especially Germany and Austria. With all his customers paying euros, he has suffered steep losses.

"I have tried hard to ask my clients to settle trade in other currencies, in dollars or yuan or whatever, just not euro," Peng said. "They have yet to agree, but I will keep trying."

About 4,000 kms (2,485 miles) away in his textile factory, Yu reflected on the vagaries of the foreign exchange market. The dollar would probably not remain his currency of choice forever.

"Life has to move on and the euro may go up again a couple of years from now," Yu said. ($1="6.828" Yuan)