Bankers hawk hedging as trade war hits China’s yuan

China’s latest currency slide has sparked fears that the US trade war could be broadening into a currency war. (AFP)
Updated 22 August 2019

Bankers hawk hedging as trade war hits China’s yuan

  • The yuan has fallen about 11 percent against the dollar since start of the US trade war 17 months ago

SHANGHAI: In a Shanghai room packed with small businesses ranging from furniture makers to garment exporters, Zhu Yuan, a currency expert at Bank of Communications, explains why Chinese companies need to build their defences against currency volatility.

“Currency swings are now largely at the mercy of geopolitics and Sino-US relations. The yuan’s value is getting nearly impossible to predict,” he told members of the city’s chamber of commerce.

“Relatively volatile yuan fluctuations have exposed enterprises to big currency risks.”

The yuan has fallen about 11 percent against the dollar since Washington announced its first hefty tariffs on Chinese imports 17 months ago.

The latest jolt came early this month, when authorities surprised markets by letting the yuan slide through the psychological support level of 7 to the dollar to decade lows, unsettling Chinese firms such as exporters and heavy borrowers of foreign debt.

Company executives listened with rapt attention as Zhu drew parallels with a house on sale to explain the basics of one hedging tool, a currency option. It is like putting down a deposit, he said, so that one has the right to buy the property in three months at a fixed price, no matter how prices change. With no quick end to the trade war in sight, Chinese bankers, consultants and exchange operators are milking the opportunity to sell risk-mitigating tools that they claim will allow company bosses to sleep better at night.

“As the yuan cracks seven, uncertainty ahead will only increase,” said Zhu Jianhua, a senior executive at commodities importer Shanhan Resources.

Currency volatility is relatively new for Chinese businesses. Until 2015, when Beijing adopted a more market-driven currency policy, the heavily managed yuan had been on an almost uninterrupted decade-long firming trend against the dollar. Beijing’s trade war with Washington since 2018 has spawned increased uncertainty and volatility.

At the end of 2018, only 230 China-listed companies — less than 7 percent of total — were engaged in hedging, as per their disclosures to the exchange. Analysts say that partly explains why earnings in China, and hence share prices, are more volatile than those in the US.

According to an estimate by Industrial Bank Co, daily average trading in onshore yuan derivatives accounted for just 0.05 percent of the country’s total import and export volumes in 2016. 

China Merchant Securities estimates that, if the yuan falls 3 percent against the dollar in 2019, China-listed airlines and other transport companies could be hit with a combined 5.6 billion yuan (SR3 billion) loss, equivalent to 4.3 percent of their net profit.

As the yuan’s latest slide sparked fears the trade war could be broadening into a currency war, China’s central bank urged companies to take precautions.

“We hope that companies don’t expose themselves to currency risks too much,” the People’s Bank of China said on Aug. 5.


Saudi-led group reinstated as builder of Bulgaria gas pipeline

Updated 16 September 2019

Saudi-led group reinstated as builder of Bulgaria gas pipeline

  • Bulgaria’s Supreme Administrative Court announced that the Saudi-led group’s main competitors for the project had dropped a legal challenge relating to the award
  • Bulgaria’s state gas operator Bulgartransgaz had initially chosen the Saudi-led group — made up of Saudi Arabia’s Arkad Engineering and a joint venture including Switzerland’s ABB

SOFIA: A Saudi-led consortium was definitively reinstated on Monday as the builder of a new gas pipeline through Bulgaria, intended to hook up to Gazprom’s TurkStream project.
Bulgaria’s Supreme Administrative Court announced Monday that the Saudi-led group’s main competitors for the project had dropped a legal challenge relating to the award.
The latest development brings to an end a long-running tussle between the Saudi-led consortium and its competitors for the project, a consortium of Luxembourg-based Completions Development, Italy’s Bonatti and Germany’s Max Streicher.
Bulgaria’s state gas operator Bulgartransgaz had initially chosen the Saudi-led group — made up of Saudi Arabia’s Arkad Engineering and a joint venture including Switzerland’s ABB — to build the 474-kilometer (294-mile) pipeline.
But Bulgartransgaz later decided to strike the winner off the tender for failing to supply documents needed to sign off the contract.
Instead it accepted the offer of the second-placed consortium led by Completions Development.
However, Bulgaria’s competition watchdog ruled in July that the operator should honor its previous commitments and sign a contract with the Saudi-led group.
The watchdog’s verdict was subject to a final appeal in the courts but the Supreme Administrative Court announced Monday that the appeal had been withdrawn, meaning that the Arkad-led group has now been definitively reinstated.
Bulgartransgaz is in a hurry to complete the pipeline as soon as possible in a bid to enable Russian gas giant Gazprom to hook it up to its TurkStream pipeline after it becomes operational at the end of this year.
Bulgaria, which is heavily dependent on Russian gas for its domestic needs, has been repeatedly criticized by both the EU and the United States for failing to diversify both its gas sources and its delivery routes.
The Balkan country hopes to start receiving Caspian Sea gas from Azerbaijan’s Shah Deniz field as well as liquefied natural gas from various sources via terminals in Greece through a 182-kilometer (113-mile) interconnector expected to be ready by the end of 2020.