Chinese Exporters Avoid Dollar, Former Reagan Advisor Doesn't Mind

The dollar’s decline has resulted in more than foreign central banks looking to diversify out of the currency. Chinese exporters are increasingly favoring non-dollar currencies as well.

Alibaba.com, an Internet broker that connects Chinese exporters to foreign buyers, told the Financial Times that a large majority of its 700,000 Chinese clients have turned away from dollars in settling their transactions with non-U.S. buyers.

The reason: the dollar’s drop makes holding the currency less attractive.

"Everyone has an incentive to diversify their currency exposure, and that applies to the private sector, not just the public sector,” David Gilmore, a partner at currency consulting firm Foreign Exchange Analytics, tells MoneyNews.

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"It doesn’t make much sense if you’re selling goods to Europe and settling in dollars.”

Chinese companies have traditionally thought in simple terms about their foreign exchange and other corporate treasury strategies.

"But now they’re getting more sophisticated,” Gilmore says. "It’s an effort to defend the bottom line.”

Many exporters around the globe have traditionally favored taking dollars in their overseas sales. That’s because the dollar’s role as the world’s reserve currency made them confident that they were safest with greenbacks.

But the dollar has dropped 16 percent against the euro and the yen over the past year and 9 percent against the renminbi.

China exports about $1.2 trillion worth of goods a year, so the currency decisions of the country’s exporters can have an impact on foreign exchange rates.

"This is just another reason to expect the dollar to weaken,” Gilmore says. "That weakness won’t go away until the economy rebounds, which looks six to 12 months away.”

He sees the dollar falling another 5-10 percent by the time that happens.

To be sure, not everyone thinks the dollar’s drop is a worrisome development. Martin Feldstein, former chairman of President Reagan’s Council of Economic Advisors, argues in a Financial Times opinion piece that the dollar’s depreciation represents a positive trend.

That’s because a weak dollar stimulates exports by making them cheaper in foreign currency terms.

"Real U.S. exports are up 17 percent in the past two years, and the trade deficit has come down 11 percent from its peak in 2006,” writes Feldstein, now an economics professor at Harvard.

And he implies that further dollar weakness would be welcome. "The trade deficit last year was still more than $700 billion, or 5.1 percent of gross domestic product,” Feldstein notes.

"Since U.S. imports are still nearly twice as large as U.S. exports, it takes a very large fall of the dollar to shrink the net deficit.”

A smaller trade gap, of course, means higher GDP, which is a crucial issue, given the consensus that the U.S. economy has probably already entered a recession.

In any case, the dollar hasn’t fallen in a dramatic fashion when you look at the long term, Feldstein points out. "The real, inflation adjusted value of the dollar against a broad basket of currencies has declined only 7 percent over the past 20 years, i.e. less than 0.5 percent per year.”

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