Yuan swings hurt Chinese developers, but hedging can hurt more
Despite suffering huge foreign exchange losses due to unexpected yuan devaluation in the past year, Chinese developers are still divided on hedging options because of their restrictively high cost.
“There’s been a significant growth in the number of enquiries from corporate China this year, around 50 per cent of which came from the real estate sector,” said Eric Sim, senior adviser to UBS investment bank and a specialist in foreign exchange.
Sim said Chinese companies are aware of the benefits of hedging but have little experience of using it as the yuan has either appreciated or fluctuated within a narrow range in the past decade, before it started getting more unpredictable last August. The yuan declined more than 4 per cent last year after China’s central bank suddenly depreciated the currency by 2 per cent that month.
Hong Kong-listed Chinese developers, with significant exposure to bonds denominated in US dollar, saw net profit for last year eroded by exchange losses, with some reporting losses of more than 1 or 2 billion yuan.
Evergrande Real Estate, the country’s second largest developer by sales, said its forex losses from borrowings amounted to 2.8 billion yuan in 2015, or 27 per cent of its net income, up from 47 million yuan the year before.
With the yuan widely expected to lose another 5 per cent this year, developers, including Greenland Hong Kong, Country Garden and Sunac China, said they have arranged for currency hedging to lock in a predetermined exchange rate range for their US dollar exposure.
Even though hedging can insulate profit margins from forex swings, the cost of hedging this year is likely to be high compared with previous years, said Sim. That has put some developers off hedging plans.
“Hedging is not buying insurance, it can only give a certain protection within a certain rate range during a certain period,” said Greentown’s chief financial officer Feng Zheng. The builder incurred net foreign exchange losses of 426 million yuan last year.
Feng said many of the company’s investors suggested it use hedging but that it found it too costly. According to Feng, it could cost over 500 million yuan to hedge Greentown’s US$2.5 billion exposure, more than the company’s forex losses last year.
“Our loss is now only on book. We can turn it around if the yuan appreciates, but hedging is an actual expense,” he added.
Greentown plans to use US dollars generated from overseas projects to redeem dollar bonds this year to offset the currency impact. It also says it will tap more onshore bonds instead of offshore dollar bonds this year to avoid currency hits.