UK retailers plump for renminbi

British retailers are more willing to settle clothing orders in China in renminbi to reduce foreign exchange costs. [Provided to China Daily]

Currency choices are proving to be a make-or-break decision for some in the clothing industry

For many years British retailers and manufacturers have traded with Chinese businesses using the dollar or sterling. Now a growing number of retailers are paying their Chinese suppliers in renminbi.

"Businesses have been talking about the possibility of paying in local currencies since the peg was relaxed on the renminbi in June lasy year, but it is only in the last few weeks that these conversations have actually resulted in trades for our clients," Sam Ford, head of Risk Solutions at Barclays, told China Daily.

Barclays Capital says more British retailers are paying in renminbi to deliver cost savings of up to 8 percent.

The Chinese currency has appreciated at least 7 percent against the dollar in the past 18 months, so Chinese suppliers commonly embed a buffer into contracts signed in the dollar to guard against further renminbi appreciation.

Michael Vrontamitis, regional head of product management for Northeast Asia at Standard Chartered Plc, says a growing number of companies switched to the renminbi for trade settlements in the third quarter this year, showing that businesses are now more comfortable with this payment method.

It makes more sense for businesses that have subsidiaries in China to carry out offshore renminbi trade transactions particularly if they have two-way trade flows so they can net off their transactions and significantly reduce their foreign exchange costs, Vrontamitis says.

This is especially so for the clothing industry, which typically signs contracts six to eight months before products are delivered, during which time exchange rates can change greatly. With currency risks eliminated for Chinese suppliers, they would be more willing to give British importers better deals.

Marginal profit gains derived from this payment method can be a life-saver for some British clothing retailers. The sector experienced the largest year-on-year fall in sales this autumn since August 2009, a report by the British Retail Consortium says.

"Many clothing and footwear retailers have to introduce discounts to clear stocks because mild weather this winter means people are not buying large and expensive items like coats and boots. At the same time, low confidence and falling disposable incomes are putting people off non-essential spending," says Richard Dodd of the British Retail Consortium.

"As we are entering the crucial season in the run-up to Christmas the outlook may be described as hopeful, but that's as good as it gets, I am afraid," says Helen Dickinson, head of retail at the accountancy firm KPMG.

Another factor contributing to reduced profit margins for British businesses is the growing cost of imports from China because of its domestic inflation, which has been as high as 6.5 percent this year.

But paying suppliers in renminbi would allow British retailers to gain access to a wider base of Chinese suppliers and pick the most cost-effective ones.

The value of China-UK trade was $64 billion (48 billion euros) last year, the China Britain Business Council says.

When the British Prime Minister, David Cameron, was in China in November last year the two countries agreed to increase the value of bilateral trade to $100 billion by 2015.