Corps should hedge future forex receivables on strong RMB

The Chinese currency is expected to appreciate in 2013, prompting corporates to hedge future US dollar and euro receivables in the context of offshore and onshore renminbi payables, says Standard Chartered.

  • 22 Jan 2013
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The downward adjustment of USD/CNY and USD/CNH forecast trajectory adds new weight to arguments for hedging future US dollar and euro receivables in the context of payables.

Both the onshore and offshore renminbi is anticipated to strengthen 2.1% to 6.10 and 2.3% to 6.08 respectively against the US dollar by the end of 2013, according to Standard Chartered (StanChart) in a research report on January 21.

“The downward shift in our forecast trajectory is, to some extent, an acknowledgement that the two spot exchange rates have persistently traded below both the People’s Bank of China (PBoC) daily USD/CNY fix and our forecast trajectory over the past couple of months,” said Robert Minikin, senior foreign exchange (FX) strategist at StanChart.

The final PBoC fix of 2012 – at 6.2855 – was not far from the bank’s year-end forecast of 6.28 but was a full 0.88% above the USD/CNY spot market level at the end of the year.

Recent data has also been supportive of renewed appreciation.

China’s December trade data surprised on the upside, with exports up 14.1% year-on-year and the trade surplus recorded at US$21.6 billion. Other evidence does suggest some pick up in trade volumes ahead of end-2012 with the world’s largest container shipping company reporting “strong shipments” led by Asia-Europe trade, says StanChart.

As a result, corporates should start adopting proper hedging strategies, notes adds the bank.

Given the upward slope in the deliverable forwards and expectations of persistent renminbi appreciation, the economic incentive for US dollar sales in the forwards builds steadily with the length of the maturity of the forward contract.

“Based on our USD/CNY and USD/CNH forecasts for end-2014, the Chinese currency is roughly 6.5% too cheap in the forward market at this maturity,” said Minikin. “In general, in these longer expiries, corporations should hedge in the deliverable forward markets rather than the non-deliverable forwards.”

Globalisation rebounds

StanChart’s Renminbi Globalisation Index (RGI) – an index that measures the internationlisation of the offshore renminbi across markets and geographies – rebounded and hit a new high of 737 in November, up from a revised 731 in October.

Three of the RGI’s four constituent parts grew over the month of November: dim sum bonds and certificate of deposits (CDs) outstanding, offshore deposits outstanding, and trade settlement and other international payments.

“We believe the structural rise in renminbi settlement of China’s trade will continue in 2013,” said Kelvin Lau, Greater China economist at StanChart. “The resumption of renminbi appreciation expectations will help to preserve the prevailing CNH premium over the CNY spot price and attract more renminbi to leave China under the current account and be sold offshore.”

The resulting boost to offshore liquidity should support further CNH asset growth. The bank predicts CNH deposits in Hong Kong to grow to at least Rmb700 billion (US$112.6 billion) by end-2013.

A stronger CNH spot rate over CNY makes foreign exporters more willing to receive renminbi directly and foreign importers will convert at the onshore spot rate via the offshore clearing bank, notes StanChart. Chinese importers should also have a greater incentive to make cross-border trade-related renminbi transfers to their offshore purchasing arms before doing US dollar conversion.

“Such trade settlement practices may prevent a substantial widening of the CNH premium, but we believe a small premium on the back of mild renminbi appreciation,” said Lau.

Additionally, London is leading the way among the emerging offshore centres for renminbi-denominated Swift payments to and from China and Hong Kong.

“This trend has allowed London to close the overall RGI gap with Singapore…,” said Lau. “European corporates have made significant progress in using the renminbi.”

The RGI is forecasted to rise more than 50% this year.

  • 22 Jan 2013

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1 Citi 41,733.81 194 9.42%
2 HSBC 40,945.92 235 9.24%
3 JPMorgan 37,214.87 151 8.40%
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5 Deutsche Bank 20,416.10 78 4.61%

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1 JPMorgan 13,485.80 35 12.64%
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1 Citi 15,985.59 61 11.10%
2 JPMorgan 14,992.78 59 10.41%
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1 UniCredit 3,966.12 27 13.01%
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5 HSBC 1,663.71 16 5.46%

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