By love-89.com During a press briefing on October 22, the State Council Information Office provided insights into the foreign exchange balance data for the first three quarters of 2024. Li Hongyan, Deputy Director of the State Administration of Foreign Exchange (SAFE), emphasized the agency’s commitment to supporting businesses in managing currency risk.
Li highlighted the continuous enhancement of the forex market’s ability to assist companies in managing exchange rate risks. The development of a robust ecosystem now includes a comprehensive suite of internationally recognized forex derivatives, such as forwards, swaps, and options. Currently, over 120 banks—spanning large, medium, and small institutions, both domestic and foreign—are authorized to conduct forex derivatives business, facilitating services across various regions in the country. These offerings encompass all major currencies involved in cross-border settlements, backed by thorough infrastructure for trading and clearing.
Moreover, Li discussed efforts to cultivate a risk-neutral perspective among businesses, encouraging banks to strengthen their foreign exchange services, particularly for small and medium-sized enterprises (SMEs). As a result of these initiatives, companies have progressively improved their ability to manage currency risks. Notably, in the first three quarters of this year, enterprises utilized over $1.1 trillion in forex derivatives for currency risk management, with more than 32,000 businesses engaging in currency hedging for the first time—both figures marking historical highs.
In a shifting landscape of open economies and market-driven exchange rates, Li stressed the importance of currency risk management for businesses. She pointed out that forex derivatives are crucial tools for hedging against such risks. While some companies express concerns regarding the costs and effectiveness of these financial instruments, Li clarified that there is an established market pricing mechanism for forex derivatives. For instance, the pricing for forward contracts is determined based on spot exchange rates adjusted for interest rate differentials between currencies. Additionally, purchasing foreign exchange options can be likened to buying insurance, which requires paying a premium. It is essential for companies to recognize that incurring a reasonable cost for hedging can yield significant benefits by converting the uncertainty of future exchange rate fluctuations into certainty, thereby mitigating their impact on business operations.
Li also noted that practical market experience indicates companies should judiciously use forex derivatives in line with their exposure levels, while accurately assessing the outcomes. She cautioned against simplistic comparisons of locked-in forward rates with spot rates at maturity to gauge the success of hedging strategies.
Lastly, Li reiterated that assisting businesses in managing currency risk remains a priority for SAFE. The agency plans to enhance market training programs, encourage financial institutions to optimize their services, and collaborate broadly to reduce the costs associated with forex hedging. In August, SAFE updated its official website to include the “Guidelines for Managing Exchange Rate Risks for Enterprises,” which features market practices and several case studies. This guide, she hopes, will provide targeted assistance to businesses, particularly regarding the application of hedge accounting.