In Depth: Why Chinese Companies Hesitate to Hedge Forex Risk

Imagine you are running a Chinese electronics-maker that signed a deal with an American manufacturer on Jan. 4 to buy $10 million worth of microchips for your company’s line of Internet-connected gizmos, with payment due on delivery in U.S. dollars.

Let’s say those chips arrived on Aug. 1. When the deal was done, the purchase was set to cost your company 63.7 million yuan. However, due to the yuan’s depreciation against the dollar this year, the price of that $10 million payment increased to 67.5 million yuan over the first seven months of this year. That’s a 3.8 million yuan ($563,000) loss for doing nothing but running your business as usual.