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.