Wednesday, November 16, 2011

import/export always involves forex trade (my take

A Chinese toy maker may advertise her products in both RMB and USD, and you may think that Walmart buying these products doesn't involve any forex transaction.

However, what about the suppliers (and workers, and rent) of the Chinese manufacturer? Those payments must be in the local currency. (Most manufacturers have a margin below 30%, so) typically at least 70% of the money Walmart paid must be converted to RMB sooner or later.

Even the remaining 30% (or less) is often repatriated to local currency as well, but i can only speculate some of the reasons --
- dividend payout or owners taking out profit
- expand the business
- fund a new business

Incidentally, I believe the advertised USD price is often uncompetitive. Walmart (the buyer) gets more competitive prices from a forex dealer bank. Larger amount and higher credit of Walmat's would help narrow the bid/ask spread. The advertised USD price is either rather high (for smaller customers) or requires a large order size.

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