China Forex Regulator Urges Firms to Strengthen Risk Management

China's foreign-exchange regulator called on domestic trading companies to strengthen risk management to mitigate the impact of exchange rate volatility on their business.

At its recently concluded 2018 work meeting, China’s State Administration of Foreign Exchange (SAFE) listed guidelines to companies to establish risk-neutral awareness and sound risk management among its priorities for this year.

Foreign trading companies are the major players in China’s onshore foreign-exchange market, but many medium- to small-sized enterprises, which are used to making one-way bets on exchange rates, have faced significant losses from recent larger volatility in the yuan exchange rate, SAFE said.

Many companies have not put risk management in place due to inadequate understanding of risks and hedging, SAFE spokesperson Wang Chunying recently said in a press conference.

“Some companies may find they bet in the wrong direction and rush to adjust their risk exposures, but such a unified move may lead to unbalanced supply and demand of foreign exchange, aggravate the fluctuations of the yuan exchange rate and the interest rate, and contribute to panic and chaos in the market, eventually increasing systematic risks and harming their own business,” said Wang.

An executive at a big trading firm told Caixin that most companies still consider the expense of exchange rate risk management as a loss, but not a necessary financial management cost.

Many medium- to small-sized trading companies are not motivated to learn about foreign exchange risk management and could feel overwhelmed with the complicated forex market mechanism, said a foreign exchange business manager at an foreign-funded bank.

Wang said some companies are unwilling to pay the money, or regard hedging as a means of speculation and ignore its essential function of offsetting the risk of uncertainty.

“If companies do not change their mindset and still make one-way gambling instead of hedging their risks, they may not be able to adapt themselves to even normal market fluctuations, and may take irrational actions out of panic,” Wang said.

The SAFE promised it will provide more guidance to market players and will urge financial institutions to educate clients on risks.

The regulator said its other priorities this year include promoting capital account convertibility, cracking down on foreign exchange irregularities, and supporting “capable and qualified” companies to invest overseas.