BOC moves to limit US dollar risks
With an unhedged forex exposure of US$17b, the bank diversifies its offshore assets as yuan strengthens
Bank of China is diversifying its offshore assets away from the falling American dollar and reducing its overall foreign exchange exposure as the yuan continues its inexorable rise, BOC president Li Lihui said.
BOC has the largest unhedged foreign exchange holdings of any Chinese bank - the main reason its Hong Kong and Shanghai-listed shares have underperformed those of its competitors.
'Our foreign exchange client assets and client liabilities are basically balanced and we don't have risks in that area. We face risks mostly in our proprietary assets,' Mr Li said in an interview. 'Now we are diversifying our foreign exchange holdings based on our reading of the market.'
According to BOC's latest interim results, its total unhedged foreign exchange exposure is about US$17 billion.
'Although our exposure will increase every year, we plan to reduce it by converting some foreign currency into yuan and limiting it each year to about US$12 billion,' Mr Li said.
BOC has also invested about US$12 billion in its foreign operations, including Bank of China (Hong Kong) and other Hong Kong subsidiaries. These assets depreciate as the yuan rises, but this does not affect the bank's business operations. 'Even if it manages to limit its foreign exchange risk, the yuan's ongoing appreciation will still hurt BOC and mean it will continue to be valued at a much cheaper valuation than other banks,' according to BNP Paribas banking analyst Dorris Chen.
BOC's Hong Kong shares closed on Friday at HK$3.90.
Since its public share float in June, BOC has risen about 24 per cent, while China Construction Bank is up about 83 per cent from its IPO in October last year.
Mr Li said BOC had already converted all of the US$11.2 billion it raised in its Hong Kong initial public offering into yuan in order to avoid 'very large foreign exchange risks'.
Last week, BOC used nearly US$1 billion of its foreign exchange to acquire Singapore Aircraft Leasing Enterprise and analysts say they expect additional purchases in the future as a way of reducing forex risk.
'We think the airline leasing business is very promising, particularly in China and Asia.
'We have no immediate plans to make further acquisitions but we will consider any other suitable acquisition targets we come across,' Mr Li said.
At present, the return on US dollar assets is about two percentage points higher than the return on yuan assets, so if the yuan appreciates more than that, BOC's financial performance will be affected.
'One percentage point of appreciation above 2 per cent will affect us negatively to the tune of around one billion yuan and two percentage points will take it up towards two billion yuan,' Mr Li said.
'As long as it stays within this sort of range, we can absorb the loss and manage the risks.'
The yuan appreciated about 3.5 per cent this year but Mr Li said the pace of appreciation will moderate next year, despite increasing political pressure from the US and other trading partners for the pace to accelerate.
'I think the speed of revaluation will be about the same as the average speed of the last two years,' Mr Li said.