China Tells Banks to Promote Currency Hedging as Yuan Strength Fuels Export Losses

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China's State Administration of Foreign Exchange has instructed banks to promote hedging of currency risk by corporate clients, according to multiple people familiar with the matter. The aim is to prevent mounting losses at exporters from a yuan that keeps rising against the dollar. The informal guidance, known as window guidance, was carried out over the past few months, with SAFE's local branches asking banks to raise the hedging ratio on customers' currency exposure, the people said. Some branches appear to have paid subsidies to companies that expanded hedging, covering part or all of the premium cost of currency options. Banks in coastal areas with concentrated export industries were urged to raise ratios to about 40 percent or more, while some banks in regions with relatively subdued trade activity were asked to lift hedging ratios to the national average. The yuan has risen about 4.3 percent against the dollar this year and is trading near its strongest level in about four years. Based on SAFE data, companies signed currency derivative contracts worth about 1.4 trillion dollars in the first half of this year, up about 40 percent from a year earlier. The nationwide hedging ratio stood at 35.3 percent, up 5.3 percentage points from the end of last year. Analysis by Goldman Sachs shows currency losses in the first half reached about 70 billion yuan, the largest in a decade, accounting for roughly 4 percent of total corporate profit, though the firm said that given the substantial profit growth of exporters, such losses remain at a manageable level.

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