China’s State Administration of Foreign Exchange (SAFE) has issued informal guidance to banks urging them to encourage corporate clients to hedge foreign-exchange risk, according to multiple people familiar with the matter. With the Chinese yuan trading near its strongest level against the dollar in roughly four years and squeezing earnings at export-oriented companies, the regulator has moved to stem widening FX losses.
According to the sources, the informal directive—known in China as “window guidance”—was issued over the past several months. With domestic demand remaining sluggish in the Chinese economy, the export sector stands out as one of the few bright spots, and authorities are deeply concerned that currency fluctuations could erode those earnings.
The yuan has appreciated about 4.3% against the dollar this year and is trading near its strongest level in about four years. While the market expects the pace of appreciation to slow, the impact on exporters is already materializing. Goldman Sachs analysis indicates that first-half FX losses reached approximately CNY 70 billion (approximately $10.4 billion)—the largest in a decade—accounting for roughly 4% of total corporate profits.
SAFE’s regional branches have asked banks to raise hedging ratios on their clients’ FX exposure. Banks in coastal regions, where export industries are concentrated, were urged to lift ratios to approximately 40% or higher, while some banks in regions with relatively subdued trade activity were also asked to raise hedging ratios to the national average.
Some local branches have reportedly provided subsidies to companies that expanded hedging, covering part or all of the premium costs on currency options, according to one of the sources. All sources spoke on condition of anonymity because they were not authorized to discuss the matter publicly.
FX Derivatives Trading Surges
According to SAFE data, the value of FX derivatives contracts signed by companies in the first half of the year reached approximately $1.4 trillion, up about 40% from the same period a year earlier. The nationwide FX hedging ratio rose to 35.3%, up 5.3 percentage points from the end of last year.
The rush by Chinese companies into FX derivatives trading reflects not only months of yuan strength pressuring exporter earnings, but also rising volatility in currency markets driven by heightened tensions surrounding Iran. The expansion in hedging demand signals that companies are strengthening their defenses against currency risk.
| Metric | Value |
|---|---|
| Yuan appreciation vs. dollar (year-to-date) | Approximately 4.3% |
| First-half FX derivatives contract value | Approximately $1.4 trillion (up ~40% YoY) |
| Nationwide FX hedging ratio | 35.3% (up 5.3 pts from end of last year) |
| First-half FX losses (Goldman Sachs estimate) | Approximately CNY 70 billion (~4% of total corporate profits) |
Note: Figures based on SAFE data and Goldman Sachs analysis
Policy Intent and Market Impact
The regulator’s move appears aimed at encouraging exporters to prepare for further yuan appreciation or increased volatility. Bloomberg News was first to report on the expansion of these hedging measures. The financial regulator did not immediately respond to a request for comment.
China’s export sector has remained resilient, supported by robust demand for high-tech and artificial intelligence-related products, serving as a critical pillar propping up an economy struggling with weak domestic demand. Authorities appear intent on ensuring this growth engine is not derailed by external factors such as currency fluctuations.
Goldman Sachs noted in a research report that while first-half FX losses were the largest in a decade, they remain at manageable levels given the substantial profit growth at export-oriented companies.
The use of informal window guidance is a tool Chinese authorities frequently employ to exert substantive influence over financial institutions without directly regulating their behavior. The binding force of this particular guidance remains unclear, but the numbers already show that banks are stepping up hedging proposals to clients.
Many market participants expect the pace of yuan appreciation to moderate going forward. However, with geopolitical risks surrounding Iran heightening FX market volatility, corporate hedging demand could remain elevated for the foreseeable future. The regulator’s outreach to banks can be seen as a preemptive response to this shifting environment.
finance.biggo.com