57 Views

Chinese firms rush to hedge as yuan swings begin to sting

© Reuters.  Chinese firms rush to hedge as yuan swings begin to sting© Reuters. Chinese firms rush to hedge as yuan swings begin to sting

By Samuel Shen and John Ruwitch

SHANGHAI (Reuters) – Hobbled by the yuan’s unexpected surge this year, more Chinese companies are trading currency derivatives to hedge risks, although many mainland firms remain exposed to swings in China’s increasingly volatile currency.

Companies in China have for years been accustomed to a stable yuan that moved in one direction for long periods of time. Yuan hedging markets are still in their infancy, stymied by the central bank’s stringent requirements for hedging and the limited participation of speculators and large state-owned firms, which could make markets more liquid.

But that is changing. Volatility has risen steadily since 2015 after the People’s Bank of China decided to let market forces have a bigger sway in the yuan’s direction, clamped down on capital flows and, more recently, introduced more opacity in the way it sets the currency’s value.

The yuan slumped 6.5 percent against the U.S. dollar in 2016, but has unexpectedly reversed course this year, surging 5.3 percent so far.

More than 70 China-listed companies have announced plans this year to use derivatives for risk-hedging, according to Reuters’ calculations based on exchange filings. Among them, 27 firms are trading yuan forwards, swaps or options for the first time.

“Last year, when the yuan was falling, there was no need to hedge, because depreciation was on our side,” Jiang Tao, an investor relations official at Shenzhen Yuto Packaging Technology Co, told Reuters.

The Chinese exporter of gift boxes and stickers is one of the 70 companies reviewed and generates over 60 percent of its revenue overseas. In the first half of this year, it posted a 47.5 million yuan currency loss due to a stronger yuan.

It says the less predictable currency trends have prompted it to use derivatives this year to hedge risks.

Although Reuters’ calculations are not exhaustive, with some companies not disclosing their use of derivatives, it nonetheless shows a rising interest in hedging currency risks. Between 2012 and 2014, only about 30 companies each year announced hedging plans, but that number jumped to 68 last year.

“It’s more about mentality, than about competence,” said Oliver Rui, Professor of Finance and Accounting at business school CEIBS.

Rui, who sits on the boards of several Chinese companies as an independent director, said most firms are not used to hedging because the yuan has only become more volatile in recent years.

Corporate China’s still evolving risk-management culture, however, poses a dilemma for Beijing, which has been under international pressure to liberalize the yuan while also seeking to prevent destabilizing currency swings.

EXPORTER COMPLACENCY

China has seen a rise in foreign exchange transaction volumes between banks and clients, a barometer of companies’ hedging activities, which has tracked increasing volatility in the yuan over the past six months.

But that monthly turnover of around $500 million is tiny for the world’s second biggest economy, which has an annual trade turnover of $3.7 trillion yuan, as well as increasing offshore financing and investment activities. Several local companies have turned to overseas derivatives market, such as Hong Kong’s yuan futures, or non-deliverable forwards (NDFs).

A lack of participation by China’s state-owned enterprises (SOEs) in the derivatives market has also kept volumes low. Many such firms were barred from being too active in the onshore yuan market after incurring losses in overseas derivatives during the 2007-08 global financial crisis.

For export-oriented manufacturers such as Shenzhen Yuto Packaging Technology Co., a strong yuan has meant weaker dollar income.

According to an estimate by brokerage Minsheng Securities, China’s listed manufacturers recorded currency losses totaling 8 billion yuan ($1.20 billion) during the first six months, equivalent to 1 percent of their combined net profit. Nearly 1,400 listed firms in the sector said they suffered.

Shandong Laiwu Jinlei Wind Power Technology Co is another firm making its debut in the currency derivatives market. It last month announced plans to conduct hedging worth up to $40 million for 2017.

Others, such as Kingclean Electric, have been stung by unhedged positions. The home appliance maker, dubbed “the King of Cleanliness”, booked a 62.9 million yuan currency loss in the first half and as a result posted a meager 2 percent net profit gain despite a 37 percent surge in sales.

Liu Zheng, an analyst at Zheshang Securities Co, pointed to Kingclean’s U.S. dollar cash pile, worth more than $400 million at the end of June, which he says was unhedged. The company didn’t return emailed requests for comments.

“Apparently, the company was betting that yuan would depreciate further, following last year’s tumble,” Liu said.

sponsoredArticle = ‘div-gpt-ad-1466339494851-0’;

Get the best viral stories straight into your inbox!

Don't worry, we don't spam

Latest Posts

9 tips to last longer than 13 minutes
Uncategorized
81 views
Uncategorized
81 views

9 tips to last longer than 13 minutes

adminuser - January 19, 2018

It’s common to equate sexual prowess with sexual stamina — although, amazing-and-short sex is almost always preferable to awful-but-long banging. Most people might not want to admit…

Julian Assagne warns: “If you don’t invest in Bitcoin during the current meltdown you will regret it for the rest of your life!”
Uncategorized
1831 views
Uncategorized
1831 views

Julian Assagne warns: “If you don’t invest in Bitcoin during the current meltdown you will regret it for the rest of your life!”

adminuser - January 16, 2018

WikiLeaks founder Julian Assange claims his organization has made a 50,000 percent return on bitcoin after investing in the cryptocurrency in 2010 — and it's all thanks to the…

WikiLeaks founder claims 50000% ROI on Bitcoin with this
Uncategorized
1097 views
Uncategorized
1097 views

WikiLeaks founder claims 50000% ROI on Bitcoin with this

adminuser - December 29, 2017

WikiLeaks founder Julian Assange claims his organization has made a 50,000 percent return on bitcoin after investing in the cryptocurrency in 2010 — and it's all thanks to the…

Watch: The cutest puppies of 2017!
Uncategorized
8855 views
Uncategorized
8855 views

Watch: The cutest puppies of 2017!

adminuser - December 27, 2017

As the 2017 is coming to an end check the cutest puppies of 2017!     https://www.youtube.com/watch?v=p079QtWvf7o  

There is no need to own Bitcoin to become a millionaire. This 21…
Uncategorized
3351 views
Uncategorized
3351 views

There is no need to own Bitcoin to become a millionaire. This 21…

adminuser - November 24, 2017

  You don't have to have any trading experience. Jared (of London, UK, aged 21) has discovered a miraculous method that lets anyone with a cell phone earn thousands…

Here is how you can start trading Bitcoin easily
Uncategorized
223 views
Uncategorized
223 views

Here is how you can start trading Bitcoin easily

adminuser - November 23, 2017

How to Trade Bitcoin in 4 Easy Steps Open a trading account with Bitcoin Code Fund your account Choose between contracts Start trading Bitcoin is the world’s…

Watch how dogs are protecting little children!
Uncategorized
30263 views
Uncategorized
30263 views

Watch how dogs are protecting little children!

adminuser - November 22, 2017

Those dogs are true bodyguards! You are in a serious danger if you mess with them. https://www.youtube.com/watch?v=0kcGex88PnM  

Funny Life with a Golden Retriever
Uncategorized
16136 views
Uncategorized
16136 views

Funny Life with a Golden Retriever

adminuser - November 16, 2017

This Dog would be your best buddy too! https://www.youtube.com/watch?v=n7-o7eoMaWM

WATCH: Cutest babies’ conversation you will ever see
Uncategorized
7731 views
Uncategorized
7731 views

WATCH: Cutest babies’ conversation you will ever see

adminuser - November 9, 2017

Two babies got along together!   https://www.youtube.com/watch?v=_UfFY6PSVu0

This cat doesn’t take no as an answer
Uncategorized
623 views
Uncategorized
623 views

This cat doesn’t take no as an answer

adminuser - November 8, 2017

This cat is stubborn.   https://www.youtube.com/watch?v=7zSkgwOJ7mY