FX shifts throw spanner in firm's works

"We've seen greater demand from them to sign agreements with banks, wishing to lock in profits," Yuan said.

Companies are using forward contracts, under which a transaction is settled in the agreed foreign currency, amount and exchange rate on a specified date or during a specified future period.

Weng Wensen, deputy head of Bank of China's Fujian branch, said between Jan 1 and May 20, the branch had conducted $5 billion in forward transactions for local businesses wanting to hedge currency risks.

The figure was up 34 percent compared with the same period of last year, he said. Throughout 2012, such business totaled $9.2 billion.

Ye Wen'an, general manager of Fuhua Craft Products Co Ltd, which is located in Anxi county of Fujian province, said this round of yuan appreciation has posed the biggest challenge ever for him. "This is the most terrible period in terms of currency fluctuation that I can recall."

His company sells all of its products to customers in Europe and the United States, with 60 percent of the transactions settled in dollars.

The company's net profit margin is 5 to 6 percent, but yuan appreciation could shave 2 percentage points off that figure, Ye said.

"Appreciation of yuan against the dollar has directly affected our profit for each order. Sometimes there is even a loss if we accept a client's order."

He said he has fixed the payment currency rate between 6.28 and 6.37 with the Bank of China, preserving profits of 170,000 yuan on average for orders valued at $1 million.

The company has gained 1.28 million yuan from a total $12.8 million in forward foreign currency purchases and sales, according to Ye.

But not all businesses are turning to currency hedging.

Lu Xiangyang, general manager at Xiamen Sheep Anti-Fatigue Mat Co Ltd, said there is no point in just looking at currency rates and forward contracts to determine profits.

"The most important thing is that we must explore our own capabilities. To me, it's simply just paying more attention to technological innovation and trying to improve profitability."

Lu said he annually allocates 5 to 10 percent of the company's output value to research and development, and he is increasingly turning to automation.

With more than 60 workers in a factory of 8,000 square meters, the company's output was valued at 30 to 40 million yuan in 2012.

China's government tends to let the currency appreciate more before some kinds of events, said Louis Kuijs, chief China economist at the Royal Bank of Scotland Group.

"Based on the patterns of the past three and one-half years, we would expect Xi Jinping's visit to the US would have an impact, although we are less convinced about the impact of the July Strategic Economic Dialogue between China and the US."

But Liu the ANZ economist said although the People's Bank of China continues to set a strong yuan fixing, the onshore yuan spot rate has weakened in the past few days, suggesting that appreciation pressures have eased somewhat.

"We reiterate our view that the yuan's fast appreciation path is not sustainable. The currency has appreciated by almost 20 percent against the yen this year. More importantly, other regional currencies have also depreciated following the weakness of the yen and the strong US dollar."

The persistent appreciation of the yuan against the dollar in recent months has led to widespread speculation that the central bank may be preparing for a more flexible exchange rate regime.

The International Monetary Fund said on May 29 that the yuan is still considered to be "moderately" undervalued relative to a basket of currencies, and it added that in the medium term, the currency should have more flexibility.

Lu Zhengwei, chief economist at Industrial Bank Co Ltd, said the Chinese monetary authorities should broaden the permitted trading range of the yuan from the current 1 percent to 2.5 percent as soon as possible, before gradually loosening it to 10 percent by the end of 2014 and 20 percent by 2015.

Zhang Ming, an analyst at the Chinese Academy of Social Sciences, said the appreciation of the yuan would probably moderate during the second half of this year. For the year as whole, Zhang said, the currency might stand somewhere between 6.1 and 6.15 against the dollar.

"At present, the operating conditions of China's export enterprises are already very gloomy. Once investment growth drops, the importance of the export sector to the whole economy will loom large. "Policy makers have to consider the impact of the yuan on the sector as employment pressure rises."

He said the official plan to further broaden the yuan's fluctuation range might be postponed given the current economic situation, and the government's tighter controls over short-term capital flows would also gradually reduce appreciation pressure on the currency.