China firms may hedge debts after fall in yuan

HONG KONG • The yuan's devaluation is a wake-up call for Chinese companies that rarely hedge overseas debts, BlackRock and Aviva Investors Global Services say.

China's second-biggest steel-maker Baosteel Group, its largest vehicle rental company Car and developer Country Garden Holdings said they are considering hedging after the Aug 11 devaluation.

Rising demand pushed up the cost of such trades, with the extra interest payments to lenders of yuan in five-year cross-currency swaps jumping 0.16 percentage point in two weeks to 3.18 per cent. "Until recently, lots of Chinese companies had regarded the US dollar- yuan exchange rate as a one-way bet. Therefore, there was little need to hedge," said Mr Tim Jagger, a Singapore-based portfolio manager at Aviva. "Clearly that relationship has changed and companies now need to do more hedging. But hedging costs have also gone up."

Companies already face more than US$14 billion (S$19.6 billion) in extra costs on overseas liabilities after the yuan slid 2.8 per cent this month, according to calculations based on Bloomberg data.

JPMorgan Chase forecasts further declines of up to 5 per cent in the currency in the next 12 months.

"We will focus more on foreign exchange rate risk management and will make more use of foreign exchange management tools including spot, forwards and financial derivatives to hedge," said Baosteel's vice-president in charge of corporate finance Chen Ying.

Car is also seeking short-term hedging for interest payment of offshore debt, mostly through forwards, according to its chief financial officer Wilson Li.

Country Garden's investor relations manager Ma Ziling said the firm will monitor its forex status.

Costs for forwards or swaps can be as high as 3 per cent, said Mr Gregory Suen, investment director for fixed income at HSBC Global Asset Management Hong Kong.

"The recent yuan volatility will be a call for Chinese companies with significant foreign debt or imports to start focusing more on hedging," said portfolio manager Suanjin Tan at BlackRock in Singapore.

A better way to manage a weakening yuan is to issue bonds on the mainland as a natural hedge, said Mr Suen. Chinese developers have sold 134.1 billion yuan (S$29 billion) of notes this quarter, exceeding the total in the previous four quarters.

Geely Automobile has been employing some natural hedging strategies including selling foreign currency debt for overseas parts purchases and when investing in production outside of China, said its executive director Lawrence Ang.


A version of this article appeared in the print edition of The Straits Times on August 29, 2015, with the headline 'China firms may hedge debts after fall in yuan'. Print Edition | Subscribe