Chinese firms warned to strengthen foreign exchange safeguards
- State Administration of Foreign Exchange says firms must evaluate forex exposure and come up with ‘scientific’ hedging plans
- Beijing is still on high alert for capital flight and is watching to see what impact US policies will have on the yuan’s exchange rate
The Chinese authorities have urged companies to better manage their foreign exchange exposure and adopt hedging tools amid concerns that cross-border capital flows and the yuan’s exchange rate could be tested as Washington prepares for monetary tightening.
In a report released on Thursday, the State Administration of Foreign Exchange (Safe) urged them to carry out a thorough analysis of business operations and evaluate forex risk exposure before making “scientific” and “effective” hedging plans.
“There were still corporate actions against exchange rate neutrality in risk management,” its half-year report on the balance of international payments said.
“Some companies did not have hedging tools for their forex exposure or their coverage was insufficient, while some deviated from their main businesses to arbitrage with forex derivatives.”
Chinese companies have invested about US$600 billion in derivatives to manage their forex exposure in the first six months, an increase of 94 per cent from a year earlier. The end-June hedging ratio was 22.8 per cent, an increase of 7.5 percentage points from a year earlier.
About 115 banks now provide hedging tools, such as forwards, swaps and options, and that can already meet the demand of corporations, it said.
China’s international payments were fairly balanced in the first half of this year. It registered a US$122.7 billion current account surplus, or 1.5 per cent of gross domestic product. Meanwhile, the January-June deficit of capital and financial accounts stood at US$56.2 billion, narrowed with the help of a US$13.3 billion surplus in the second quarter.