Editorial

CART, F1 coming to grips with doing business in China

 

 by Mark Cipolloni
January 28, 2003

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This China Unique web page gives a good explanation of how the conversion with the Chinese RMB works and how the RMB is valued
Freely floating currencies on the open market change daily in response to a endless combination of economic, market, country, internal and worldwide forces. China (PRC, i.e. mainland China) and Hong Kong are two exceptions. They do not allow their currency to float. Rather, they tie it to the U.S. dollar. This means the exchange rate versus the U.S. dollar is changed very infrequently. When it is changed, it tends to be very significant.

The conversion rate was last changed by the government in 1994. Other currencies will float versus the Chinese RMB in relation to their respective change to the U.S. dollar. Note a number of countries also set their exchange rate to the U.S. dollar and therefore will not float versus the Chinese RMB. Among these currencies is the Hong Kong dollar.

In a free market society where currency is openly bought and sold, the local country inflation is largely offset by the change in exchange. This is true to the extent that there is also world wide inflation. Assuming worldwide inflation is perhaps best represented by the rate of U.S. inflation, then the net impact over time of inflation and exchange is the rate of U.S. inflation.

This is a short version of Exchange rate fundamentals. It excludes intervention of governments to control their currency or to limit a precipitous downfall. Now here is a complicating factor: The PRC does not allow it's currency to float on the open market. The result of this is that the above theory may work relatively fluidly in an open market, it will not occur in perfect lock step with the PRC.

Over time however, rates must adjust. During a period of high inflation, a country with a fixed exchange rate will use foreign currency reserves to hold their rate steady until those reserves are exhausted. An exchange rate change in this instance is inevitable, it is just a matter of when. When this occurs, the rate adjustment will be significant.

The PRC manages this constant exchange rate by the level of foreign exchange they hold. As a result the exchange rate has remained very stable in the past few years, despite inflation that remains in low double digits.

Things you should know about currency and exchange before you go for the first time: Contrary to many other countries, the conversion rate is the same (almost the same) wherever you convert your currency, whether it is a bank, hotel or currency exchange booth. While the official rate is 8.3 RMB to 1 USD, the actual exchange rate will receive in converting cash is slightly lower than 8.1, so use credit cards wherever possible and you will receive a rate nearer the official exchange rate.

Make sure you keep your receipt from the currency exchange. Because the Renminbi is not freely floated, you can not sell back excess Renminbi without the receipt. Upon departure at the airport, turn in you excess Renminbi along with the receipt when you bought Renminbi. A common mistake is to confuse the Hong Kong dollar for the Renminbi. The Hong Kong dollar has more value, so either put them away when you arrive in country or recognize the difference.

Here are the current rates:
One U.S. $ = 8.3 China PRC Renminbi (RMB) = 7.7 Hong Kong Dollar (HKD)
One Renminbi = 1.028 Hong Kong Dollar or, One Hong Kong Dollar = .928 RMB

CART's rumored announcement of a TV deal in China (a story broke by AutoRacing1) with Beijing TV that will put their viewership numbers on par with F1's TV package for 2003 has caused speculation regarding how CART teams are planning to take advantage of the opportunities potentially available to them in the world's fastest growing market.

The recent press releases from Alex Yoong's camp would suggest perhaps this is why he says he is "not losing any sleep" about finding a CART team to drive with this year. Yoong is obviously the big winner and a sure prize to the CART team that hopes to pry open the Chinese sponsorship market.  This is important for CART, especially with the rumors they will race in Beijing starting in 2005.


China Currency - RMB

But not even Alex Yoong can change the fact that China's currency, the Renminbi (RMB), is not convertible currency on the international market. Even though China acceded to the World Trade Organization (WTO) last year didn't mean its currency can be deposited into the local bank and withdrawn in your favorite denomination. This fact has put the brakes on more than one race team's hopes of finding new sources of money from China, but it's a hurdle that can be overcome.

Apparently China's currency is not convertible because the Chinese government fears that those around the world who practice the art of futures trading in international currency could find some less-than-perfect economic principles at the Chinese Ministry of Economics and Finance. If you read about the '98 Asian Financial Crisis you will learn that it was all about currency trading and speculating.

Or, more specifically, how futures buying in currency can drive a floating currency down and bankrupt a country. China can't float their currency because it might sink and cause the political system to collapse along with it.

Computerized currency trading in NY City in 1998 drove Thailand, Singapore, Russia, Korea, and Brazil to bankruptcy and Hong Kong managed to survive only by propping up the currency with government money. At the time, the leader of Thailand said it was the American government who did it - the American government said poor economic principles were the culprit.

One European driver who had F1 hopes sent some his commercial team to China recently to locate and secure some funding for his desired F1 ride. He had contacts, credentials, and a good plan to lure a major Chinese company to sponsor him. After the first day of negotiations the team reportedly sat in a house of ill-repute, ordered a beer, and laughed that no one told them the currency wasn't convertible. That made their first foray into the China sponsorship market a little more difficult than they planned and made the trip to China much shorter than expected.

Most F1 teams have the advantage of a relationship with a major automotive manufacturer who already has a big operation in China. They aren't pushing to find a sponsor as much as they are hoping to use motorsports to assist with marketing their non-racing products to the Chinese. Whether CART does, or does not, have the expertise to get a piece of the China market, remains to be seen. Obviously the big question is whether they can do it without a bevy of major automotive manufacturers to guide their way.

Regarding CART and F1 teams getting money out of China, here are some examples of how it can be done - Walt Disney does a lot of business in China....sometimes they take foreign currency which China has plenty of as they sell a lot of goods to American and they also accumulate US$ when they sell to other countries as those countries take US$ in payment. AND sometimes they don't mind taking RMB as they also buy merchandise manufactured in China from companies that don't mind having payment in RMB.

The Chinese companies that have US$ are plentiful and invariably these are companies that also need to advertise their goods, so getting the US$ to pay for such advertisement is no problem for them, legally (applying to the China central bank to buy US$ for such purpose) or illegally (paying the media owners or CART teams from their off-shore accounts).

Yes, the RMB is not traded in the open market (not convertible) but neither is the Malaysian ringgit (followed China in 1998 to avoid the Asian crash) and the Indian rupees (since 30 years ago) and many other currencies. However, Americans and the rest of the world are still actively trading with India and Malaysia and, therefore, China.

CART teams can either elect to have payment in US$ or RMB if they have the need for Chinese goods (steel, coal, food products, beer, soft toys, iron ore, merchandise, electronic and electrical goods) and many other products widely exported. We assume they would take the cash.

So it will be interesting to watch and see how CART takes advantage of the opportunities, and whether hiring China's most marketable motorsports commodity, Alex Yoong, is the key to finding a way to business over there.

But things won't stay that way for long,. "China is opening up and they are learning the ropes as well of how the free trading world works. At the end of the day, free enterprise helps China economically, politically and socially."  China has pledged to expand the scope of RMB business gradually and to eliminate all geographical restrictions within five years of entering the World Trade Organization (WTO).

The author can be contacted at markc@autoracing1.com

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