China companies 'bleeding' from yuan devaluation seek hedging help

100 Yuan notes are seen in this file illustration picture in Beijing.
100 Yuan notes are seen in this file illustration picture in Beijing.PHOTO: REUTERS

HONG KONG (BLOOMBERG) - Chinese companies are seeking hedging services like never before after the yuan slid to a five-year low earlier this year.

Financial service provider KVB Kunlun Global Capital Ltd forecasts its foreign-exchange hedging business will double this year, as fears of further yuan drops linger even after the currency rebounded in recent weeks. Hedging volumes at the firm jumped more than 50 per cent in January-February from a year earlier, the sharpest two-month increase ever.

Business also picked up at banks such as BNP Paribas, Hang Seng Bank and Bank of China Hong Kong.

The yuan devaluation in August signaled an end to a decade of strengthening that had encouraged Chinese firms to become Asia's biggest dollar borrowers and to largely ignore protection against exchange-rate reversals. A 4.4 per cent tumble in the currency in 2015 caught out some companies, including developer Country Garden Holdings, which reported a 1.64 billion yuan (S$343.6 million) net foreign exchange loss on financing activities in the year.

"Many Chinese companies are bleeding after the shock devaluation of the yuan in August," said David Zheng, global dealing manager at KVB Kunlun Global Capital. "Although the yuan rebounded recently, more companies now believe the currency can go either way instead of just moving in one direction up as before."

"Country Garden will continue to cut dollar exposure and use local financing for local projects," the company said in an e-mailed reply to questions. "Besides that we have done some FX hedging deals for renminbi/US dollar borrowing."

Greenland Hong Kong Holdings said this month it has entered into forward contracts of US$100 million to protect itself against yuan-dollar currency risk. China SCE Property Holdings is in close contact with banks for potential FX hedging and will "take action at the right time," the developer's finance controller Paul Li told a March 18 briefing.

Chinese firms have cut foreign-exchange risk by redeeming US$2 billion of overseas notes before maturity this year, up from US$26 million a year earlier, Bloomberg-compiled data show. Six of the seven companies that called bonds were builders, which had binged on dollar debt amid cheaper rates offshore and restrictive rules on local debt sales. Shanghai-based developer CIFI Holdings Group Co last week said it would redeem on April 15 its 12.25 per cent US$500 million notes due 2018.

"I saw an increase in FX hedging business at our bank this year, mostly in basic products such as spot, simple forward and cross-currency swaps," said Andrew Fung, head of global banking and markets at Hang Seng Bank in Hong Kong.

Bank of China Hong Kong has seen more clients taking the initiative to hedge their FX exposure, according to Kera Kong, renminbi strategist at the bank.

Shanghai-based Shui On Land Ltd's 2015 net profit fell by half largely due to the impact of yuan depreciation on its US dollar and Hong Kong dollar debt, it said in a statement last week. Agile Property Holdings said in February it expects net profit for 2015 to plunge 70 per cent citing "significant exchange losses" from yuan depreciation.

One-month implied volatility on the yuan jumped to 5.4 percent from 1.2 per cent just before the August devaluation. Fluctuations could wipe out some companies' full-year profits, according to MR Zheng from KVB Kunlun.

"The FX hedging business in Asia is virgin territory," Mr Zheng said. "The higher yuan volatility combined with a slowing Chinese economy makes it harder for companies to make a profit. They are really thinking about how they can better manage their finances."