(Yicai Global) March 29 -- The rising strength of the Chinese yuan is damaging the profits of export companies and impeding the recovery of foreign trade.

The redback is appreciating even faster this year than last, with both the onshore and offshore rates against the dollar hitting new highs and approaching 6.24 this week, Economic Information Daily reported today, saying this is affecting not only small- to medium-sized exporters, but also listed firms and some of the world's leading export companies.

Some of the main businesses to suffer are those working in the electronics, textiles, furniture, automotive, machinery, toys and footwear sectors, which are highly dependent on the US. Several listed firms that export electronics have said that the exchange rate has led to them making a loss.

Fomdas Holding Group Co., based in China's eastern province of Zhejiang, was one of the first companies to industrialize agriculture in the country. Exports, mostly of canned fruits and vegetables and flowers, make up more than 90 percent of its business and are shipped to Japan, Europe and the United States. Fomdas ran into cash flow difficulties in January when it needed to pay its employees and suppliers.

"In 2017, the company took 20 percent more orders than the previous year, but lost CNY10 million (USD1.6 million) because of exchange rates," said Wei Hanjun, an executive at the firm. "That made up more than a third of the year's profit."

More than 40 percent of orders at Huayu Electrical Appliance Group Co. come from the US, Deputy General Manager Huang Zhaoqi said. It took 23 percent more orders this year but the yuan's appreciation and rising material costs offset profits, he added. The company tried to raise prices by 5 percent, but sales took a hit.

Short-Term Effects

As the yuan continues to rise, companies will continue to lose money through the exchange rate and may become less interested in exporting, which could have a negative impact on some of China's outbound trade, which has been recovering well. Data from the General Administration of Customs shows that in January, China's total trade tallied CNY2.51 trillion (USD400 billion). Exports grew 6 percent to make up more than half of the total, while imports soared more than 30 percent, narrowing the trade surplus by 60 percent to CNY136 billion (USD21.6 billion).

A great contrast in the growth rates of imports and exports shows that China is honoring its commitment to import more, said Li Huiyong, chief macro-economist at Shenwan Hongyuan Securities. But it also reminds China to accelerate development of new competitive advantages in foreign trade, he added.

Historically, the yuan's value has negatively correlated with exports, Li continued, saying that exports tend to fall about six months after the yuan climbs. The redback started rebounding in the middle of 2017, so the effect on exports will start to show this year, he added, forecasting that the annual growth rate of exports will be slightly lower this year.

Long-Term View

"Our competitors don't have to deal with sharp rises in the cost of raw materials or money lost from the exchange rate," Li added, saying the strengthening exchange rate could hurt the real economy in the long run. China's export-oriented companies face international competition and are at a disadvantage as the yuan appreciates, he said.

The US tends to support a weak dollar policy to stimulate exports and regain its status as a manufacturing powerhouse, which leads to yuan strengthening, added Wang Youxin, a researcher at the Institute of International Finance under Bank of China Ltd. Paired with the ongoing trade frictions with the US, a stronger yuan will make it harder for China's exporters and real economy to develop, he said.