Devalued and Risky: Should You Proactively Finance Chinese Suppliers?

The level of nuanced arguments surrounding China’s dual-move to a more freely floating currency, combined with an immediate devaluation – close to 5% at the time of writing this piece – has reached a fever pitch in international business circles. Aside from my own views about China’s general behavior from a business context, I personally believe it’s an ingenious move of desperation that would have been difficult to predict ahead of time.

Some context is in order here – I spent many years engaged in China sourcing projects, including visiting and working with suppliers on-the-ground in the region.  And today, our parent company, Azul Partners, also has resources on the ground in China for our coverage of the local metals markets. We also work with numerous organizations in an advisory capacity that are deeply engaged in sourcing from and developing Chinese suppliers.

From a sourcing perspective in terms of negotiation with suppliers over price decreases, we recently shared some advice for our subscribers on Spend Matters in a research brief, What a Devalued Chinese RMB Means For China Sourcing Strategies. But speaking more broadly than negotiating price decreases as a result of the devaluation, there is the broader question of supply risk with Chinese vendors – and the level of action companies should take to protect their supply chains through active trade financing programs.

Chinese suppliers previously had many sources of capital available to them to fund operations – VAT rebates schemes, bank loans, third-party non-bank loans, online lending schemes (which the government started cracking down on this summer, labeling some as simply ponzi schemes). But today, except for state owned companies, capital availability can prove challenging, especially for smaller manufacturers. Moreover, the move toward open account trade and away from letters of credit can further delay payments to vendors exporting their goods.

Given this situation, Trade Financing Matters strongly recommends that companies either sourcing from China for export or engaged in working with suppliers to support local operations consider taking action by implementing payables financing and invoice discounting programs – or even PO-based financing.

This is not a question of “profiting” from the supply – it is about reducing supply risk. The same strategies hold true of working with suppliers in Southeast Asia, which tend to move in lockstep from a risk perspective with the situation in China.

But where to begin? At the very least, consider the L/C again as an option on the export side, with the ability for suppliers to draw down on it based on triggers before an invoice. Also consider getting suppliers engaged in an invoice discounting program. More advanced companies may also consider setting up buy/sell or trading operations to take control of different levels of the supply chain, as many high tech organizations have.

If this is a topic that concerns you, please do not hesitate to drop us a line. We recently wrote the above-linked brief on sourcing strategies based on a question from a reader. We’re happy to answer additional questions as well.

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