Chinese Companies Loaded With Dollar Debt, Have Little to No Risk Management

Chinese companies loaded up on USD loans either to arbitrage interest rates and earn financial profits when the industrial economy was slowing or they used FX loans (USD, EUR, JPY) to cut their financing costs, since credit was cheaper abroad. In either case, they had no idea of the risk they were taking on, and thus no strategy to deal with it. If this is your wheelhouse, you may find many consulting opportunities in China.

This article is by a for Bank of China trader currently working at an investment consulting firm.

This is mainly reflected in six aspects: First, rigid preservation concept. Enterprises in the arrangements for foreign currency loans, without considering the corresponding exchange rate hedging, the lack of hedging derivatives products and the corresponding understanding and awareness, did not advance in the institutional hedge prepare accordingly. Changes in the market makes companies struggling to cope with the rush.

Second, the subjective judgment and decision making. For the exchange rate and interest rate changes, a lot of enterprises according to the lack of objective research and analysis, and more vulnerable to the impact of market changes in exchange rates and interest rates, thereby affecting the normal business activities of enterprises.

Third, the lack of understanding of financial products. We saw some enterprises, especially large state-owned enterprises, financial derivatives there fear, lack of proper understanding of the product. Therefore reluctant through derivatives to hedge currency and interest rate risks.

Fourth, we have speculation. Because the exchange rate and interest rate fluctuations, foreign currency liabilities of some companies appear book loss. At this enterprise is not reasonable to consider how to use hedging strategies and tools, on the contrary hopes to gamble with the market, trying to greater exposure to loss of fishing back.

Five is one-sided understanding hedging costs. In the study of hedging products and strategy, companies do not want to bear the cost of hedging foreign exchange forwards, foreign currency options and interest rate swaps that hedge miss the favorable opportunity, and therefore had to bear and hold the exchange rate and interest rate risk exposure, so that more passive in the hedge management and strategy development.

Finally, the neglect of non-US dollar currency fluctuations. In addition to the US dollar, euro and yen currency business finance low-interest currencies also keen. But it is worth noting that the international foreign exchange market, the euro against the dollar, the dollar annualized volatility of the yen in more than 10%. When the market changes, the risk of non-US dollar exchange rate of foreign currency loans faced much higher than dollar loans.

...A large state-owned enterprises is our risk management consulting client, has a large dollar debt. Under our assistance the company gradually formed a risk management system and risk management operational processes, while together with the enterprise combing the exchange rate risk facing the future. In an accurate understanding of the basis of the exchange rate risk, by comparison with the cost and effectiveness of risk hedging products, the risks are locked, to avoid the adverse effects of exchange rate fluctuations to the enterprise. At the same time, we have business-related personnel training system to help enterprises build a business specialization in financial risk management team.
Few companies in China still have no idea what they've gotten themselves into, but how many have yet to develop a sound strategy to deal with rapidly increasing risk?
EO: 汇率大幅波动,外币负债企业如何应对

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