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Companies that conduct business in China and sell to Chinese customers must contend with the ever-changing business climate and market environment. Additionally, geopolitical tensions have been especially tenuous in the past five years, and while some issues have improved under the Biden Administration, many tensions and roadblocks still exist, says Michael Hayashida, senior managing director and head of global foreign exchange (FX) risk management at East West Bank.
One major sign of improvement towards a more relaxed diplomatic relationship between the U.S. and China could be evidenced by the video meeting that U.S. Treasury Secretary Janet Yellen held with China’s Vice Premier Liu He in June. They discussed the economy, the prospect of increased cooperation and several other matters. No other details were mentioned.
“They had a meaningful discussion, and the global financial markets ostensibly received it well,” Hayashida says. “It was the first step towards an improved relationship between the world’s two largest economies.”
Despite that, the current business environment has been one of the most challenging in the past 20 years of doing business in China, says Stanley Chao, managing director for All In Consulting, a Rancho Palos Verdes, California-based company that has completed 100 projects for companies in China.
“Before the U.S. had an open-door policy for exporting—promoting and assisting all kinds of companies in the consumer products, high tech, software, industrial and agricultural industries to sell to China,” Chao says. “It’s just the opposite now. Everything that remotely resembles a civilian-military type product or technology will get a second look by both the [U.S.] commerce and defense departments.”
Businesses should check with the departments and obtain a written confirmation that their products or technology are legally sellable in China. The restrictions from the federal government span many industries that the U.S. dominates, including semiconductors, aeronautical, oil and gas, telecommunications and artificial intelligence, Chao says.
“This is a big blow to many U.S. companies that consider China either their largest or second largest market,” he adds.
The regulatory environment with China demonstrates competing geopolitical agendas, says David Jacobson, professor of the practice, real estate risk management and business law at Southern Methodist University in Dallas, Texas.
“The U.S. is trying to protect its intellectual property, punish China for its human rights abuses, level the trade and transactional playing field, and reinvigorate the Western alliance in support of democracy and fair play,” Jacobson explains.
Since the Federal Reserve has kept interest rates low, the U.S. dollar has weakened while the Chinese yuan has risen to higher levels against the greenback. This has resulted in Americans shelling out more money for Chinese products.
One issue that makes conducting business in China difficult is that the government does not allow for capital to flow freely in and out of the country, Hayashida says.
Another mitigating factor is that the Chinese yuan (CNY) is currently only allowed to trade within a 2% range above or below the CNY Central Parity Rate—a daily reference rate fixed by the People’s Bank of China. The Chinese yuan is “very much a managed currency and highly regulated,” Hayashida says. “Consequently, it does not appreciate or depreciate too quickly or too much.”
The Chinese government is taking a very active role in managing monetary policy and foreign exchange policy without providing much transparency or clarity, which ultimately makes it quite challenging for companies doing business in or with China. In contrast, in the U.S. the Fed is more transparent; there is a far greater degree of free market enterprise, and publicly traded U.S. companies regularly provide clear forward guidance regarding monetary policy and key financial metrics. This policy provides greater transparency and predictability, thereby helping to stabilize financial markets overall.
One solution for companies doing business in China is to adopt bridge banking services. Customers can also gain access to other critical banking services such as loans, cash and treasury management services, as well as various foreign currency products.
“We try to help facilitate cross-border transactions through our cash and payments risk management services in order to help streamline the international payments process, while concurrently helping our customers get the best possible yields on their foreign currency deposits,” says Hayashida.
Companies can also create a subsidiary in China by forming a Chinese company that is independent from their U.S. operations, Chao recommends.
“Look to set up independent operations in China, as both China and the U.S. tighten up export restrictions and raise tariffs,” he says. “This means having a real, physical presence in China, hiring Chinese staff, manufacturing in China and selling in China. The key is to plan for the worst and hope for the best.”
Some tailwinds exist for businesses. President Joe Biden is willing to work with China on issues such as climate change, managing future pandemics and space exploration.
“We saw Ambassador John Kerry visit China earlier this year to discuss climate change, which resulted in some positive vibes between the two countries,” Chao says. “This may be the impetus for both countries to temper down the hostile rhetoric. The key is that both countries must be willing to sit down and pragmatically hash out their differences.”
While the regulatory environment between both countries remains a hurdle for businesses, there are still strategic opportunities for businesses, and bankers will continue to stay on top of any new developments that concern regulation, monetary policy and foreign exchange policy, Hayashida says.
“We are seeing a seismic shift in the dynamics of the global economy, and we can help businesses navigate through the complexities of a seemingly ever-changing global market environment,” Hayashida says.
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