SHANGHAI/SINGAPORE, Aug 31 (Reuters) – Fearing losing potential gains in U.S. currency, Chinese exporters have adopted complex currency swap strategies to avoid converting dollar earnings into yuan. This was revealed in official data and conversations with companies.
China’s state-owned banks are the counterparties to some of these swap transactions that allow exporters to exchange dollars for renminbi, despite authorities’ attempts to curb intense pressure on the renminbi in the spot market. However, it suggests that the country’s currency regulator is comfortable with these deals.
Exporters like Ding, a Shanghai-based businessman, hold fast to dollar earnings and are reluctant to sell the dollar, which has fallen to its lowest level in nine months, for the yuan.
“My exporter friends and I have been discussing whether we want to use foreign exchange swaps to earn yuan,” said Ding, who trades electronics and toys.
“The main concern is that the dollar price will continue to rise.”
The yuan has depreciated more than 5% against the dollar so far this year, and has fallen 2% this month alone, but has fallen even further as the economy’s sluggishness drives foreign capital outflows.
The swap allows exporters to bank dollars in exchange for yuan, but ultimately requires a contract to reverse the flow and return the dollar.
But analysts say China’s monetary authority cannot force exporters to actually convert dollars while eliminating a much-needed supply of dollars to the yuan’s spot market.
Chinese companies exchanged yuan with commercial banks on the onshore forward market in July alone, a record $31.5 billion, and a total of $157 billion so far this year, according to the country’s currency regulator.
Ding originally planned to convert his dollar holdings when the yuan fell above $7 to $1, a level only three times the local currency has crossed since the 2008 global financial crisis. not
But hopes have risen that the Fed will keep U.S. interest rates higher for an extended period of time, and hopes of a sustained depreciation in the renminbi have fallen as yields fall as China eases monetary policy to support economic activity. So high, he changed his mind.
“The increasing divergence in monetary policy is the main reason for this trend,” said Gary Ng, senior Asia-Pacific economist at Natixis.
“Since we are unlikely to see any fundamental change in the near term, the severity of the yield spread will push the yuan down and encourage exporters to bet on the dollar.”
How swap works
Rising U.S. yields and widening gaps with Chinese rates have also reversed interest rates in the foreign exchange futures market, leaving exporters no incentive to even peg futures rates to sell dollars. The one-year yuan is priced at 7.02 yuan to the dollar and the spot rate is 7.29 yuan.
Traders said the State Administration of Foreign Exchange allows companies to swap buy and sell dollars and yuan if they use their own funds.
If exporters swap high-yielding dollars for cheap yuan, even for three months, they can get local currency for their business needs, and they can also earn 3.5% annual returns on swap transactions.
“By trading FX swaps, exporters can defer payments while meeting yuan demand,” said Becky Liu, head of China macro strategy at Standard Chartered Bank.
A less rewarding but equally effective option is to deposit dollars at 2.8% and use it as collateral for a renminbi loan, with a net return of about 2%.
Chinese financial institutions have cut dollar deposit rates twice this year to curb hoarding and encourage exporters to exchange dollars for yuan, but many appear to have turned to swaps instead.
The partially state-owned China Merchants Bank is even encouraging exporters to use swaps.
“If companies want to keep their dollar deposits, they can enter into foreign exchange swap products to increase the returns on their dollar deposits,” the bank said in its trade advisory.
Meanwhile, the People’s Bank of China has stepped up its efforts to defend the renminbi, continuing its multi-month trend of setting the renminbi’s midpoint benchmark stronger than expected, and forcing some domestic banks to There were even calls for cutbacks in investment.
On the other hand, exporter swaps give state banks stacks of dollars to use in their renminbi operations, taking dollars from the onshore futures market and selling them on the spot market to help stem a rapid depreciation of the renminbi. Can accept swaps.
Reported by Jindong Zhang and Winni Zhou for Shanghai; Tom Westbrook for Singapore; edited by Vidya Ranganathan and Kim Coghill
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