Nervous China factory owners hedge on yuan foreign exchange risk
Yuan volatility has forced some Pearl River Delta firms to hedge foreign currency threats, adding to an already challenging environment
Pauline Ngan Po-ling is considering resuming hedging foreign exchange risks by buying yuan forward contracts in anticipation of more volatile exchange rates following the central bank's unexpected move over the weekend to expand the yuan trading band.
The deputy chairwoman of one of the world's largest makers of caps, Mainland Headwear, is worried about unpredictable movements in the yuan as the People's Bank of China allows the currency to move up or down 2 per cent daily on either side of a mid-point set under the guidance of the bank.
The trading band was expanded for the third time since the currency reform in 2005. It was first doubled from 0.5 per cent in May 2007 and now doubled again from the 1 per cent set in April 2012.
I’m fine with currency liberalisation, but it has to be gradual
"Yuan is getting more volatile, but still controllable within the 2 per cent band," said Ngan. "I'm fine with currency liberalisation, but it has to be gradual."
Mainland Headwear, which produces caps and hats in Shenzhen for export to the US and Europe, stopped buying yuan forward contracts at the end of last year, when the yuan appreciated sharply against the US dollar.
Like tens of thousands of manufacturers in the Pearl River Delta's "factory of the world", the company is exposed to significant currency risks - the weaker the value of the yuan, the better it is for exporters.
Currency volatility would exacerbate the already challenging operating environment with soaring wages, protracted labour shortages and industrial reforms.
As a result of the widening of the trading band, the yuan yesterday tumbled to an 11-month low when the onshore spot rate slid 0.45 per cent to 6.1781 to the dollar in Shanghai, according to China Foreign Exchange Trade System prices.