Two Rates, One Invoice: What the Conversion Costs

Why the Quotation Is in Dollars

Most Chinese export contracts are denominated in US dollars, some in euros, and a growing share in renminbi. The currency on the quotation decides who carries the exchange risk between the day the price is agreed and the day the money moves.

When a supplier quotes in dollars, they are taking the renminbi risk. Their costs, wages and materials are in renminbi, their revenue is in dollars, and a dollar that weakens against the renminbi between quotation and payment reduces their margin. Suppliers handle this in one of three ways: a short quotation validity, a price that already contains a cushion, or a clause allowing a price review if the rate moves beyond a band.

All three show up in the price. A quotation valid for seven days is usually a supplier managing currency, not a supplier being difficult. The same order quoted with ninety-day validity at the same number is a supplier who has built the risk into the unit price.

Where the Spread Comes From

The rate you see on a news site is a mid-market reference. The rate on your statement is a price, and the difference is the bank's margin plus the cost of moving the money.

Three components build it: the interbank rate at the moment of execution, a spread the bank applies to the pair, and fees charged separately or absorbed into the rate. On a major pair in a reasonable size the spread is small in percentage terms and still visible in absolute money on a container. On an exotic pair, or a small amount, it is larger.

Two practical consequences. Comparing bank quotes means comparing the all-in number: rate plus commission plus cable charge, on the same day, for the same amount. And a payment split into three small transfers costs more than one transfer of the same total, because the fixed charges apply three times and the spread is usually wider on smaller tickets.

There is a timing reason to look at this more than once. Bank spreads widen when a market is moving and a payment is small, so the quiet week and the volatile week do not produce the same all-in cost for the same invoice. A buyer who compares two quotes taken a month apart is comparing currencies as much as banks.

CNY and CNH Are Not the Same Currency

Renminbi trades in two markets. Onshore CNY is traded inside China under capital controls. Offshore CNH is traded outside, mainly in Hong Kong, and moves freely against the dollar.

The two prices are close and not identical, and the gap widens when flows are one-sided. If you are paying a Chinese supplier in renminbi, the rate you get depends on whether you buy onshore or offshore currency, and on whether your bank can access the onshore market at all. A European importer settling in renminbi is effectively buying CNH unless the payment is structured through a bank with onshore access.

This matters when a supplier offers a discount for renminbi payment. The discount is real, and so is the fact that you have taken on a currency you may not be able to hedge at your own bank as easily as you can hedge dollars.

When the Rate Is Actually Set

Four moments can fix the rate, and buyers assume the wrong one.

• At quotation. The price is agreed in a foreign currency and the rate is whatever it is that day. No rate is fixed; only the exposure starts.
• At invoice. The supplier invoices in dollars. Still no conversion has happened.
• At payment. You instruct the transfer and the bank executes at its rate that day. This is where almost every small importer's rate is set.
• At settlement of a forward. A contract struck earlier is settled at the agreed rate on the agreed date.

So the exposure on a 30/70 order runs from the day the price was agreed to the day the balance is paid, which on a container of consumer goods is commonly two to four months. Half the money is exposed for the whole period, the other half for longer.

One more arrangement sits outside the list: a supplier who quotes in dollars with a fixed conversion date written into the proforma invoice. It is not a hedge, and it does remove the argument about which day the rate applies, which is worth something on a first order.

Fixing a Rate on a Container

A forward contract fixes a rate for a future date. Banks offer them, they require a facility or a deposit, and most have a minimum size that puts them out of reach of a single small order.

For a buyer below that threshold there are three workable substitutes. Pay earlier than required when the rate is favourable and the supplier is trustworthy, which is a currency decision with a credit risk attached. Ask for a renminbi quotation and compare it to the dollar price converted at your bank's rate, which turns an invisible cost into a visible one. Or accept the exposure and size it: on a container of goods, a move of a few percent is a real number, and knowing what it is prevents the surprise.

What does not work is hedging after the fact. Once the balance is due, the rate is a fact.

Bank Charges and Who Pays Them

The charge code on the transfer decides who pays the intermediaries. Under SHA, the sender pays its own bank and the beneficiary pays everything downstream. Under OUR, the sender pays all charges.

Chinese suppliers usually quote SHA, which means the amount credited is slightly less than the amount sent. On a deposit that difference produces a phone call; on a balance it can produce a shortfall against the invoice and a delay while somebody agrees who absorbs it. Agree the code when the payment terms are agreed, and if the contract says the invoice amount must arrive in full, use OUR and price it.

There is also the conversion itself. Paying dollars into a dollar account involves no conversion. Paying dollars into a renminbi account converts at the receiving bank's rate, which you did not see and cannot negotiate. If the invoice is in renminbi, send renminbi.

Paying in Renminbi

Cross-border renminbi settlement is ordinary now, and some suppliers prefer it because it removes their currency risk and simplifies their bookkeeping. It is not available everywhere: your bank needs the corridor, and the documentation requirements for a trade payment in renminbi are stricter than for dollars.

Ask two questions before agreeing. Whether the price in renminbi is fixed at the same conversion your bank would give you, and whether your bank can execute the payment at all. A supplier who quotes renminbi at a rate materially better than the market is quoting a price in a currency, not a discount.

The documentation is the same set either way: contract or proforma invoice, commercial invoice, and a purpose of payment that describes goods rather than settlement.

What to Write Down

Currency losses are usually discovered, not calculated. Four numbers per order prevent that: the rate at quotation, the rate at payment, the charge code used, and the all-in cost of the transfer including fees.

With those four, the true landed cost of a container includes the money it took to pay for it, and the next negotiation starts from a number rather than a price. Without them, the freight gets scrutinised to the dollar and the currency line, which is often larger, goes unexamined.

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