The Financial Express

Bankers hawk hedging as trade war hits China’s yuan

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Signs of Chinese yuan and US dollar are seen at a currency exchange store in Shanghai, China 	— Reuters Signs of Chinese yuan and US dollar are seen at a currency exchange store in Shanghai, China — Reuters

In a Shanghai room packed with small businesses ranging from furniture makers to garment exporters, Zhu Yuan, a currency expert at Bank of Communications, explains why Chinese companies need to build their defenses against currency volatility, reports Reuters.

"Currency swings are now largely at the mercy of geopolitics and Sino-US relations. The yuan's value is getting nearly impossible to predict," he told members of the city's chamber of commerce.

The yuan has fallen about 11 per cent against the dollar since Washington announced its first hefty tariffs on Chinese imports 17 months ago.

The latest jolt came early this month, when authorities surprised markets by letting the yuan slide through the psychological support level of 7 to the dollar to decade lows, unsettling Chinese firms such as exporters and heavy borrowers of foreign debt.

Executives listened intently as Zhu drew parallels with a house on sale to explain the basics of one hedging tool, a currency option. It's like putting down a deposit, he said, so that one has the right to buy the property in three months at a fixed price, no matter how prices change.

With no quick end to the trade war in sight, Chinese bankers, consultants and exchange operators are milking the opportunity to sell risk-mitigating tools that they claim will allow company bosses to sleep better at night.

"Uncertainty will only increase," said Zhu Jianhua, a senior executive at commodities importer Shanhan Resources.

Currency volatility is relatively new for Chinese businesses. Until 2015, when Beijing adopted a more market-driven currency policy, the heavily managed yuan had been on an almost uninterrupted decade-long rise against the dollar.

But the protracted trade war with Washington has spawned increased uncertainty and volatility.

At the end of 2018, only 230 China-listed companies - less than 7.0 per cent of total - were engaged in hedging, as per their disclosures to the exchange. Analysts say that partly explains why earnings in China, and hence share prices, are more volatile than those in the United States.

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