Firms build up hedges against yuan-depreciation risks

As the yuan continues to fall against the US dollar, Chinese exporters are looking to shift exchange risk to offshore buyers

PUBLISHED : Tuesday, 08 December, 2015, 6:05pm
UPDATED : Tuesday, 08 December, 2015, 6:28pm

Onshore Chinese corporations are cutting exposure to US dollar-denominated debt and ramping up trade settled in yuan as a hedge against the mainland’s depreciating currency, according to a survey by Standard Chartered.

The findings from the survey of 173 company treasurers and senior executives around the world came just a day after mainland China’s foreign exchange reserves hit a 33-month low and highlighted the strong expectations among businesses that the yuan will continue to depreciate well into 2016.

About 80 per cent of onshore exporters said they expected yuan trade settlements to increase over the next six months, compared with only 33 per cent of exporters outside the mainland. The figures show a growing need on both sides of the settlements to protect against further slides in the value of the yuan.

Chinese exporters would look to keep trade in the mainland currency – also known as the renminbi (RMB) – “probably because they also want to shift their [foreign exchange] exposure to their offshore suppliers and buyers”, said Carmen Ling, head of RMB solutions at Standard Chartered.

Regionally, yuan-denominated trade settlements have grown rapidly this year.

Swift said last week that the yuan has become the second-most-used currency for payments between Japan and China, including Hong Kong.

China’s authorities may have beefed-up their interventions in onshore and offshore markets to defend the RMB exchange rate in the run-up to the IMF’s decision
Xia Le, BBVA

Payments denominated in yuan between Japan and China hit 7 per cent of the total, up from 3 per cent two years ago. Most trade between the two countries is still denominated in yen.

The central government allowed the yuan to depreciate rapidly over a three-day period in August. The expectation that the yuan will continue to depreciate next year has driven demand for US dollars and a strong outflow of capital from mainland China.

On Monday, the People’s Bank of China reported that foreign reserves had fallen to a 33-month low, a sign that the government has intervened in the currency market to prop up the value of the yuan.

The reserves held by the central bank fell to US$3.44 trillion at the end of last month, down US$87.2 billion, according to PBOC data.

It was also a sign that firms with offshore debt are worrying about a higher cost of repayment as the yuan continues to slide.

“Chinese firms anticipating increasingly greater exchange-rate risk since the RMB was devalued in August, as well as a heavier interest-rate burden from USD-denominated debts, are in a rush to repay their foreign debts, which has also contributed to the outflow of capital in November,” Mizuho Securities Asia’s China economist Shen Jianguang said in a note.

Research firm Capital Economics has estimated that capital outflow from mainland China may have surpassed US$100 billion in November, which would be a record.

About 30 per cent of the foreign reserves are denominated in currencies other US dollars, causing a significant depreciation in the value of the assets held by the central bank as the US dollar appreciates.

About 22 per cent of the reserves are denominated in euros, a currency that fell 4.4 per cent against the US dollar last month. That alone would have caused the foreign exchange reserves to fall by US$34 billion last month, BBVA calculated.

The International Monetary Fund said late last month that it would add the yuan to its basket of global currencies, called Special Drawing Rights. Some experts say the central bank may have used the foreign reserves to stabilise the currency in the days before that landmark decision was announced.

“China’s authorities may have beefed-up their interventions in onshore and offshore markets to defend the RMB exchange rate in the run-up to the IMF’s decision to include the currency into the SDR,” Xia Le, chief Asia economist at BBVA in Hong Kong, said in a note. “These interventions require tapping into China’s foreign reserves.”