Central bank says financial derivatives are underutilised in more flexible foreign exchange regime Chinese manufacturers and traders do not properly hedge yuan exchange rate fluctuations arising from a more flexible foreign exchange regime introduced last year, a mainland central bank survey has found. The most popular tool for currency risk hedging was trade financing while financial derivatives remained under-utilised though increasingly resorted to, the People's Bank of China (PBOC) noted. In July last year, Beijing allowed the yuan to appreciate by 2.1 per cent against the dollar and replaced the previous peg to the greenback with a reference basket to major international currencies. Recently, the central bank polled 323 export-oriented companies, including domestic and foreign-invested manufacturers and trading firms in 10 provinces, through questionnaires and case studies on their currency risk management practices. About 31 per cent of the respondents said they obtained trade financing, especially short-term trade financing, to help reduce currency risk and ease liquidity problems. 'Companies using financial derivatives [to hedge currency risks] rose by one percentage point year on year,' the PBOC report said, without specifying what portion of the respondents turned to such instruments. However, less than 4 per cent of mainland banks' foreign exchange transactions were forward contracts last year, a rough indicator of the infrequent use of financial derivatives to hedge currency risks. As much as 91 per cent of the financial derivatives employed by the surveyed companies consisted of simple forward exchange transactions - in which they agreed with mainland banks to buy or sell foreign currencies at pre-negotiated prices at a future date. However, companies in Fujian, Guangdong, Jiangsu, Shandong and Tianjin have begun to experiment with foreign currency swaps introduced since last year's exchange rate regime reform. Some foreign-invested firms and mainland companies with international subsidiaries and business partners have turned to offshore non-deliverable currency forward contracts. About 8.7 per cent of the companies surveyed raised export prices last year to offset exchange losses, up 4.5 percentage points from a year earlier. 'To some extent, this reflects Chinese exporters' growing price-setting power,' PBOC said. 'However, the percentage of companies using this method was still low. It shows the great majority of companies have yet to improve their products' core competitiveness so as to expand export volume with product quality instead of low prices.' Still more companies demanded bigger advance payments for exports or adopted more flexibility in the choice of settlement currencies. A few moved to reduce their reliance on export revenue or bought foreign currency asset management products to control exchange rate risks. 'The long-standing stability of the yuan exchange rate regime had resulted in companies' low awareness of currency risk hedging necessity and lack of understanding in hedging instruments,' PBOC concluded. State-ownership of companies further weakened incentives to take proactive measures.