Yuan hedging for Chinese corporates next driver

Amid rising volatility, the ability to switch to trades settled in renminbi and the use of other currency tools spell opportunity, says StanChart

PUBLISHED : Monday, 19 May, 2014, 3:22am
UPDATED : Monday, 19 May, 2014, 3:22am

Chinese corporates that need to switch to trades settled in renminbi and hedge their yuan exposure amid rising volatilities are seen as one of the next growth points in renminbi business, said Standard Chartered.

The currency surprisingly has lost 3 per cent against the US dollar so far this year, causing massive foreign exchange losses for Chinese corporates who thought of the yuan as a one-way bet and barely bothered with yuan hedging.

Michael Vrontamitis, Standard Chartered's regional head of product management for greater China and North East Asia, told the Post that the bank sees see greater potential in helping Chinese corporates switch to settle trade in yuan while also hedging their currency positions to facilitate yuan trades.

"In 2012 it was about why you should use renminbi and 2013 was about how to use it. This year is about educating Chinese corporates.

"If we want to see the next big growth in renminbi redenomination, they need to be educated," Vrontamitis said.

"Most Chinese corporates haven't had to deal with foreign exchange risks in the past, so these corporates now need to deal with risks and volatility," he said. "They also need to be educated more about the cost-saving benefits of switching to yuan trade."

The People's Bank of China has abolished almost all the restrictions on capital flow under the current account since announcing a yuan trade pilot scheme in 2010. Since then, trade settlement in yuan has jumped from 2 per cent of trade to 20 per cent in the fourth quarter of last year.

Such rapid growth, however, was not mainly driven by Chinese corporates, but a group of active multinationals, who switched to yuan trade to save on currency conversion costs and hedged their yuan exposure by buying forwards - allowing the renminbi exchange rate to be locked in and protecting themselves from unpredictable gyrations in the currency.

While global corporates embraced the yuan in earnest, the Chinese firms have lagged behind their international counterparts, Vrontamitis said.

"Chinese firms could save between 1 per cent to 3 per cent in costs if they knew the benefits of invoicing in yuan instead of the US dollar," Vrontamitis said, citing central bank data.

Meanwhile, the projected rise in onshore sales as Chinese domestic consumption grows should also be a factor in these considerations, he said.

The key issues that used to hold back redenomination of dollar trade into renminbi - such as the depth of the foreign exchange market, the ability to hedge, the complexity of cross-border trade and the difficult documentation requirements - have disappeared, he said.

A more volatile yuan should not be a reason that would dent corporates' interest in settling in yuan.

"Rising (yuan) volatility is causing corporates to want to control the foreign exchange risks … while the breath and depth of the growth of the offshore market has given them the confidence that they can manage those risks," Vrontamitis said.

"Big companies can come in and have large exposure without impacting the market because of the bigger pool," Vrontamitis said.

The daily turnover of the offshore renminbi foreign exchange market stands at US$26 billion, compared withUS$8 billion in 2012. Standard Chartered saw the rate of redenomination to renminbi- the ratio for corporates to switch to settle trades in the yuan - to rise to 28 per cent by 2020.

The Hong Kong Monetary Authority said in February that it expected the use of the yuan for trade settlement to rise to 30 per cent to 60 per cent of the country's total in the medium term, representing a two- to four-fold increase from the current level.