China Firms Ramp Up Derivatives Hedging to Record as Yuan Surges

Chinese companies are boosting hedges through foreign‑exchange derivatives, pushing outstanding forward contracts to record levels, as the yuan’s threatens to erode exporters’ overseas earnings.

Net outstanding forward settlement contracts reached $107 billion at the end of February, the highest level since records began in 2010, according to data from the State Administration of Foreign Exchange.

The increase in hedging comes as robust foreign-exchange conversion, an improving US-China relationship, broad weakness in the greenback and the Chinese central bank’s have boosted the yuan in recent months. The onshore currency has against the US dollar in all but one week since the end of November, and reached its strongest level since April 2023 late last month.

“The surge in FX forward contracts could have been due to the yuan appreciation trend in the past months and performance,” said Fiona Lim , a senior foreign-exchange strategist at Malayan Banking Berhad in Singapore.

While the buildup in hedging helps exporters lock in exchange rates and guard against yuan strength, it has also led to a sharp rise in companies’ net dollar settlement positions in derivatives markets. That leaves them exposed to potential mark-to-market losses if the dollar rebounds abruptly against the Chinese currency amid global volatility stoked by the in the Middle East.

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China’s accelerated far faster than expected in the first two months of the year, putting shipments on a record path before US and Israeli strikes on Iran disrupted global trade. But the escalating war — which is threatening to weaken demand by boosting inflation and slowing economic growth — has posed new risks for the world’s largest exporter.

While there is room for the yuan’s bullish trend to extend, the war in Iran has injected more volatility in the dollar-yuan exchange rate, “likely dampening yuan appreciation expectations,” said Lim.

“In addition, there is a possibility that exports growth may start to moderate without the exports tax rebates. So this rise in FX hedging may also start to slow,” she added.