SHANGHAI: 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 defences against currency volatility.
“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.
“Relatively volatile yuan fluctuations have exposed enterprises to big currency risks.”
The yuan has fallen about 11 percent 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.
Company executives listened with rapt attention as Zhu drew parallels with a house on sale to explain the basics of one hedging tool, a currency option. It is 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.
“As the yuan cracks seven, uncertainty ahead 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 firming trend against the dollar. Beijing’s trade war with Washington since 2018 has spawned increased uncertainty and volatility.
At the end of 2018, only 230 China-listed companies — less than 7 percent 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 US.
According to an estimate by Industrial Bank Co, daily average trading in onshore yuan derivatives accounted for just 0.05 percent of the country’s total import and export volumes in 2016.
China Merchant Securities estimates that, if the yuan falls 3 percent against the dollar in 2019, China-listed airlines and other transport companies could be hit with a combined 5.6 billion yuan (SR3 billion) loss, equivalent to 4.3 percent of their net profit.
As the yuan’s latest slide sparked fears the trade war could be broadening into a currency war, China’s central bank urged companies to take precautions.
“We hope that companies don’t expose themselves to currency risks too much,” the People’s Bank of China said on Aug. 5.