MNI: China Promotes FX Hedging As Yuan Swings Seen Growing

China's foreign exchange administration is trying to persuade more companies to hedge exchange-rate risk, warning that authorities will permit greater fluctuations of the currency in future and that international markets face rising volatility, economists, exporters and officials told MNI.

The need for businesses to manage exchange rate risks in cross-border trade and investment is set to increase, the State Administration of Foreign Exchange said in an emailed response to questions, adding that it is strengthening the mechanism for financial institutions to provide hedging services. SAFE is continuing to liberalise China’s exchange rate system, while international financial markets will experience greater fluctuations, it said. (See MNI INTERVIEW: Consumption, Upward Yuan Mark Beijing's Pivot)

Foreign exchange settlement and sales surplus set a record for any single month since 2021 in September, according to SAFE data, with China Foreign Exchange Investment Research Institute chief analyst Sun Bin noting that volume increased as the yuan rapidly appreciated to 7.10 against the dollar. Chinese companies need to prepare for a multi-year dollar depreciation cycle, so those caught holding U.S. currency could face losses unless they use derivatives to hedge, Sun said.

However, while People’s Bank of China Governor Pan Gongsheng has highlighted the need for the market to offer yuan futures, Sun said the authorities should provide more incentives to promote their use.

An exporter in the east of China told MNI that banks were providing forward exchange rate subsidies of up to 300 pips to attract local companies to use derivatives, but that the appeal of such products remains limited due to attractive interest rates on dollars. So long as the yuan does not appreciate to 6.90 against the greenback, current levels of interest income would offset any forex losses, he said.

The use by firms of foreign exchange derivatives, including forwards, swaps, and options, to manage exchange rate risks reached USD978.9 billion in the first half of 2025, up 28% year-on-year, SAFE said. More companies are also using the yuan in cross-border trade, investment and financing, it said, noting that from January to September 2025, 52.3% of foreign-related transactions by banks on behalf of clients were settled in yuan, versus just 43.0% in dollars.

YUAN INTERNATIONALISATION 

China’s proposed 15th Five-Year Plan emphasised the promotion of the international use of the yuan, something which Peking University Guanghua School of Management economics professor Tang Yao said would result from further opening of the capital account and the continued growth of China's trade over the next five years, with the main challenges stemming from geopolitical uncertainty. 

Policy makers should make good use of the Hainan Free Trade Port to identify pathways for capital account liberalisation, as well as further improve China's capital markets to enhance the attractiveness of onshore yuan-denominated financial assets, the professor said. 

For the near future, the yuan will remain stable, with a slight appreciation, Tang said, pointing to China’s relatively low inflation rate and economic resilience amid Sino-U.S competition. (See MNI INTERVIEW: China’s Growth To Slow Without Model Changes–Wu)

But Sun noted that measures to stabilise the yuan this year have led to its depreciating against almost all non-U.S. currencies, which he said was unfavourable for its internationalisation.

Internationalisation should rely on a diverse supply of tradable goods and a large import demand, Sun said, adding that it also increasingly involves bilateral currency swaps between central banks and multilateral central bank digital currency bridges.