Many companies listed in China project a decline in their earnings for the first half of the year, primarily due to foreign exchange losses resulting from the rising value of the Chinese yuan against the US dollar and the euro.
Approximately 130 firms on the Chinese mainland reported foreign exchange losses in their earnings forecasts for the first six months, according to recent data. Numerous exporters anticipate increased revenue but no significant profit growth, as the yuan’s appreciation offsets their gains.
For instance, Linglong Tire anticipates an 87% drop in net profit, totaling around 110 million yuan (approximately $16.2 million), compared to last year. The decline is mainly attributed to foreign exchange losses triggered by fluctuations in exchange rates.
Confronted with the challenges posed by volatile exchange rates, businesses are becoming more proactive in managing currency risk, according to a senior official from the State Administration of Foreign Exchange.
In this environment, demand for safe-haven assets has surged. Chinese companies’ contracted sales using foreign exchange derivatives increased by 40% year-over-year, reaching $1.4 billion in the first half. Their currency hedging ratio also climbed from 30% to 35%, and cross-border trade settlements denominated in yuan accounted for roughly 30% in the first five months of the year.
While it has long been understood that tools such as forward contracts and options can help companies lock in exchange rates, a growing number of publicly listed firms are still experiencing foreign exchange losses despite increasing their hedging measures.
Hedging instruments can only partially mitigate exposure to currency risk, explained Zhao Qingming, vice president of a research institute focused on technology. Even with a comprehensive hedging system, completely eliminating exchange rate risk remains impossible.
He emphasized that companies need to continually improve their risk management strategies, focusing on controlling exposure rather than reacting solely to exchange rate fluctuations.
As Chinese firms expand their presence globally, the focus of currency risk management is expected to shift from simple derivative-based hedging to broader approaches such as matching assets and liabilities in the same currency and naturally offsetting revenues and expenses, according to an industry economist.