Chinese regulators struggle to influence companies on currency risk



A Chinese yuan banknote is seen in this illustrative photo on May 31, 2017. REUTERS / Thomas White / Illustration / File Photo

SHANGHAI, June 22 (Reuters) – Chinese financial regulators are encouraging companies to hedge against currency risks as the central bank gradually loosens the yuan’s reins, but is struggling to convince local companies to hedge.

Major regulators have taken every public opportunity to stress the importance of being “risk free” in the foreign exchange market, and also forced commercial banks to teach lessons on currency hedging and broadcast messages on the currency market. social networks.

But the People’s Bank of China (PBOC) and state regulators have had limited success even as authorities step back from heavy yuan management and prepare to allow more money in and out. continental markets.

“Hedging not only increases costs, but also consumes the big profits generated by favorable currency movements,” said Han Changming, general manager of a Fujian-based trading company that imports luxury vehicles, including Mercedes-Benz. and BMW.

Last year justified this approach. The yuan had strengthened about 12% against the US dollar between May 2020 and May 2021, reaching its highest level in three years, before falling back in recent weeks.

Most importers are willing to put up with some volatility as they bet that the high growth trajectory and the attractiveness of China as an investment destination will support the bullish trend of the yuan.

Pan Gongsheng, head of the State Administration of Foreign Exchange (SAFE), said this month at a financial forum, “Don’t bet on the appreciation or depreciation of the yuan. (People who) always gamble will certainly lose.

Several of these series of regulatory pitches have barely paid off. The number of non-financial Chinese companies listed in A shares using currency hedging tools to counter market risks rose to 592 at the start of June from 519 at the end of 2020, risk management consultancy D-Union estimated. There are approximately 4,400 publicly traded companies in China.

PAYMENT PROBLEMS

The coronavirus pandemic has also deterred exporters, as staggered and delayed payments made it difficult to cover by reserving a contract to sell future earnings in dollars.

“Many exporters have been affected, mainly from the United States… where American companies have not paid their invoices on time,” Gerhard Flatz, managing director of KTC Group, a manufacturer of performance outerwear, told Guangzhou.

“Can you imagine, you start to hedge, your contracts are expiring and you don’t have the money to pay off wholesale?” For exporters, it is extremely difficult to cover themselves when they have no assurance that the payment is actually coming. “

Several retail banking sources said the rapid rise of the yuan had discouraged their corporate clients, especially exporters, from immediately converting their export earnings into yuan.

Many were also unwilling to hedge – which would involve locking in a future conversion rate – preferring to bet that the Federal Reserve’s ultra-accommodative monetary policy cut will cause the dollar to rise and the yuan to fall.

The pile of dollars that domestic companies have accumulated has grown. Chinese banks had more than $ 1 trillion in foreign currency deposits on their books in May, including $ 491.6 billion from domestic companies.

SMALL ENTERPRISES

Bill Deng, CEO of cross-border payment company XTransfer, said currency hedging instruments like options and futures can also be deemed too expensive and complex by small Chinese exporters. XTransfer provides yuan futures contracts, which are standard hedging tools, to clients, but “even so clients ask very basic questions and you need constant training,” Deng said.

A source at a major Chinese state-owned bank, which has given a series of lectures to corporate clients this year, said authorities aim to stabilize profits and employment in small businesses. Small businesses, including many exporters, account for around 80% of urban employment, according to government data.

Guan Tao, a former senior official at the foreign exchange regulator, also recently said one-way bets on the yuan’s rise could hit small exporters, forcing them to close and leading to job losses.

Tommy Xie, head of Greater China research at OCBC Bank in Singapore, says regulators can raise awareness but cannot force companies to hedge.

“I don’t think regulators are afraid of anything. As long as there is no systemic risk, you should be fine,” he said.

Reporting by Winni Zhou, Samuel Shen and Andrew Galbraith; Additional reporting by Jindong Zhang in Shanghai; Editing by Vidya Ranganathan and Ana Nicolaci da Costa

Our standards: Thomson Reuters Trust Principles.



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