Fixing prices in Yuan is an important challenge for a firm willing to offer its products in the Chinese market.
Let us consider a wine producer: how to face the financial decisions about prices in the local currency (Yuan)? The firm fixed the sale price at 6 Euros per bottle. Such price takes into account production and marketing costs, and it allows an economic margin which is adequate to the competitive context.
Such a value (6 Euro) is valid for European markets, but if the producer would like to export to China, what price should he charge for his product?
Which should be the equivalent price in Yuan?
Today, 6 Euros are equivalent to 46,42 Yuan (1 Euro=7,74 CNY). Is this the correct price to charge to Chinese customers?
To answer such a question, let’s first analyse what happened in the latest months to the exchange rate of the Euro against Yuan.
Graph: historical quotes Euro/CNY
At the beginning of 2016, the Euro was worth 7,13 Yuan. After only 6 months, in June, it had lost more than 3%. The same thing happened in 2017, when the Euro strengthened to reach 7,8 Yuan, marking a +6,4% in one semester.
Therefore, our 6-Euro bottle of wine, if put on the shelf at the beginning of 2017, would have been worth 43,8 Yuan (6×7,3). Were the firm to sell at such price (6 Euros: the fixed value to cover costs and realise a profit), it would not have realised the expected profits, and it would have eroded its margin. Such a bad impact on financial performance of the vine grower derives from a strengthening of the Euro against the Yuan during the first semester of 2017. Nevertheless the quality of his wine and his capacity to market it, currencies fluctuations penalised him.
What to do? How to protect the Euro value cashed in by the Italian firm for Chinese sales? How to preserve economic results?
A 3-step solution is available:
- Frequently update selling prices in foreign currency
With respect to other currencies, the Yuan has a contained volatility (6% per annum). However, a variation in the “wrong direction” could endanger the firm’s margins. There is therefore the need to regularly update sale prices in Chinese currency. The following graph shows how, during 2017, the progressive adjustment of prices to average exchange rates during the month leads to an increase in the price of the bottle, due to the devaluation of Yuan: from 43,7 Yuan in January, it reached 46,2 in October.
Graph: the evolution of the price of one bottle settled in Yuan
- Fix prices in the foreign currency using a reliable estimate
To update Yuan prices correctly, it is necessary to have a reference point on future exchange rate quotes. Ekuota offers (online) the instruments to have scientific and reliable estimates on currencies trends, with a determined time horizon. Based on the estimates obtained from Ekuota, it is indeed possible to fix prices, using a prudential criteria.
Ekuota’s estimates for the exchange rate Euro/Yuan for next month can be visualised in the following graph:
The reference interval of the estimate is between 7,5 and 7,9 with an average value of 7,7. In other words, the quotes of the exchange rate Euro/Yuan, for the coming month, are estimated in such an interval, with a recognised statistical validity.
In the light of such a lever, it is then up to the firm to delineate its own strategy.
A prudential attitude would entail using the extreme value of 7,9, corresponding to a devaluation of the Yuan with respect to today’s value. The producer will therefore be able to sell his bottle of wine at 47,40 Yuan.
If on the other hand the firm were to follow a more aggressive approach and wishes to present a more competitive offer, it could use the average value in the interval (7,7), and sell the bottle for 46,2 Yuan.
Those are two different positions reflecting two different commercial approaches and different financial needs. What they have in common is the possibility to make an informed choice, based on reliable estimates which allow to fix one’s own sale prices preserving financial performance, protecting margins, and remaining competitive on the market.
Third and last step. Financial markets are profligate of bad surprises. It is necessary to constantly monitor quotes trends.
This is even more true in the case the firm were to opt for an aggressive commercial approach, hence with an exchange rate for foreign markets very close to current quotations.
In this case, the user of Ekuota can ask to be alerted (through automatic notifications sent via mail). Based on parameters fixed by the user himself, “alerts” will be sent, warning about changes in prices (of currencies in our case), not to compromise the objectives of the firm.
Exports are fundamental for many firms, in every sector. Ekuota now offers new fintech instruments to preserve competitiveness on international markets.