Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Foreign Exchange Risk
While our reporting currency is the US dollar,
almost all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. All of our assets are denominated
in RMB except for some cash and cash equivalents and accounts receivables. As a result, we are exposed to foreign exchange risks as our
revenues and results of operations may be affected by fluctuations in the exchange rate between US dollar and RMB. If the RMB depreciates
against the US dollar, the value of our RMB revenues, earnings and assets as expressed in our US dollar financial statements will decline.
We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
Inflation
Although we are generally able to pass along minor
incremental cost inflation to our customers, inflation such as increases in the costs of our products and overhead costs may adversely
affect our operating results. We do not believe that inflation in China has had a material impact on our financial position or results
of operations to date, however, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels
of gross margin and selling and distribution, general and administrative expenses as a percentage of net revenues if the selling prices
of our products do not increase in line with the increased costs.
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