Renminbi hedging gains momentum

Currency volatility prompts traders, manufacturers to seek alternatives, reports Emma Dai in Hong Kong.

Rising volatility and the higher global use of renminbi have led to a sharp increase in hedging activities by traders and manufacturers, bankers in Hong Kong said.

Hedging is a process whereby traders make additional investments to reduce risks from adverse price movements in an asset.

"More and more people are now feeling the need to hedge the yuan. Demand is rising steadily," said Donald Lam, head of commercial banking at Hang Seng Bank Ltd in Hong Kong.

"The Chinese currency ended its long-standing, one-way movement earlier this year. It has now become harder to predict its movements. As a result, people with renminbi receivables are looking to hedge against depreciation, whereas those with payables are worried about appreciation. The hedging market is robust," Lam told China Daily.

Traders are also feeling the need to hedge the Chinese currency due to its volatility.

"If the yuan rises or declines by more than 1 percent over a short period, or makes several hundred basis points difference, people tend to be sensitive and actively seek ways to protect themselves from exposure to exchange risks," Lam said.

After rising against the US dollar for almost three-and-a-half years, the yuan has slipped by 3 percent in about two months since January this year. The People's Bank of China, the central bank, widened the currency's daily trading band on March 17 - from 1 percent to 2 percent. It then extended the loss for another 50 basis points to 6.2598 yuan per dollar on May 1, hitting an 18-month low.

Frances Cheung, head of Asian rates strategy at Credit Agricole Corporate & Investment Bank in Hong Kong, said: "Exporters and manufacturers are driving the hedging demand as they need to pay production and labor costs in the yuan and receive payments in US dollar. For these traders, hedging is a necessary tool to maintain revenue and to ensure that the currency volatility does not affect overall returns."

"One can sell US dollar forwards to lock up the exchange rate," she said.

The hedging ratio - the share of assets protected via hedge compared with the entire position - depends on the company's internal strategies and views on the market, Cheung said. "If the view is for a stable foreign exchange market, the company may want to hedge less."

"Even though volatility is higher, we are still confident in the yuan and expect it to pick up in the long term. Our target price is 6 yuan per US dollar," Cheung said.