Goodbaby shows mastery of risky derivatives is in its infancy

Goodbaby International, a maker of strollers and other children's products, issued a warning last week that its first-half profit would be hit by foreign-exchange losses associated with currency derivatives.

The company noted that in last year's first half it had booked a gain on its bets on how the yuan would move against the US dollar.

Goodbaby's warning underscores the fact that while more Chinese companies operating in the global marketplace need financial derivatives as a hedge, they can be unpredictable. What's more, some companies may not have enough understanding of the complex financial instruments, and flawed governance may turn such instruments into a speculative curse.

Several large companies, including Citic Pacific, a unit of the mainland's biggest state-owned investment company, were taught a lesson during the 2008 global financial crisis when their derivative positions incurred huge losses as they tried to profit by making big bets on market movements.

'I've seen a number of companies in China holding derivatives which, due to market rate movements, are exposed to mark-to-market losses, and that can cause issues,' said Simon Gleave, regional head of financial services at accounting firm KPMG Asia-Pacific.

Gleave said Chinese companies had been increasingly buying hedging products to manage their growing risks and using structured yield-enhancing products to improve their treasury management.