Chinese firms have been scurrying to derivatives to hedge against currency risk as a strengthening yuan has damaged some exporters for months, and more recently, the war in Iran has increased volatility.
The trend is record-breaking, and according to the sources, it is being promoted partly by the authorities. In the meantime, investors, businesses, and other actors are being forced into the dollar by short-term risk-aversion, and a 11-month yuan surge has stalled.
In the long run, though, hedging will make the market deeper, and the scramble to do so hints at a big change in the market as exporters will minimize their exposure to the dollar, which may soon have the effect of setting the yuan higher, especially when exports reach a high point.
Net selling of foreign currencies, often used by businesses to counter exposure through agreements at predetermined foreign-exchange rates, soared to a record high of $39 billion in January.
However, that was after the all-time net selling of dollars to Chinese banks of $100 billion in December and a massive $80 billion in January.
This trend is expected to persist because the January and February exports of China increased 22 percent, propelling the economy to exceed the previous year’s record level of $1.2 trillion of trade surplus.
Chinese exporters, who sell in dollars abroad, have long retained the majority of the proceeds and invested, and changed them back to yuan only for those amounts they need to pay business costs at home.
They have thus been selling dollars and hedging more, which has further contributed to upward pressure on the yuan, which has again promoted even more selling of dollars.
Lynn Song, Chief Economist for Greater China at ING in Hong Kong, said, “We have seen a stark transformation in market participants’ view on the yuan over the past year.”
“Where overwhelmingly we had a strong yuan depreciation bias in the markets, (we now have) almost a consensus yuan appreciation bias,” he said, which in turn is encouraging hedging that ends up bolstering yuan gains in spot trading.
This presents a sensitive position of authorities to ensure the market is not overly one-sided, and two sources told them they had urged both importers and exporters to reduce exposure through hedging.
Over the past few days, the trading volumes have soared, and it has also witnessed a short-dated option swing towards the dollar. Meanwhile, in interviews and revelations, companies reported that they are taking more refuge in yuan gains.
In recent months, the foreign-exchange regulator and central bank instructed certain Chinese banks to market the use of hedging instruments and raise the level of hedging at companies, which would be included in the regulatory health checks on lenders, two individuals familiar with the requests told, but were not allowed to speak publicly.
Sources reported that the informal directions, also referred to as window guidance, requested certain banks in one of the coastal provinces to raise the hedging ratio of their corporate clients to about 40 percent.
On a national level, it has increased to 30 percent, eight percentage points higher than in 2020, Li Bin, the deputy head of the State Administration of Foreign Exchange (SAFE), told a media briefing in January.
He added, “We will continue to strengthen exchange-rate risk management services … supporting businesses in better focusing on their core operations and mitigating risks.”
People Bank of China Governor Pan Gongsheng told the press during the National People’s Congress last week that, coupled with a 30 percent cross-border trade in yuan, it implied that some 60 percent of the trade “is relatively less affected by exchange-rate fluctuations.”
He stated, “This ratio is projected to increase further this year.” The PBOC declined to comment when contacted by Reuters, and SAFE did not immediately respond.
The next strong incentive is the losses facing the companies that are holding dollars when the greenback has lost almost 6 percent of its value against the yuan in the last 11 months.
Deputy Financial Officer, Michael Don, reported that Huizhou Sanchuang Technology, a Chinese manufacturer of cooling gadgets, has radically changed its approach over a year ago. The company was holding idle cash in Hong Kong wealth management products, which earned income and gains with a rise in the dollar.
“Now, we settle the dollar receipts as soon as we get them,” he said. A company filing indicated that Beijing Ultrapower Software blamed its 28 percent slump in 2025 profit in part on the strength of the yuan.
Suzhou Junchuang Auto Technologies remarked that its 31 percent fall in its annual earnings was attributable to a rising yuan. Other companies that reported foreign exchange loss include Robot maker Ninebot, Shenzhen Hello Tech Energy, and Shenzhen Hui Chuang Da Technology.
Liu Wencai, Founder of Risk-Management Consultancy D-Union, indicated that in response, many firms have turned to forwards, options, and swaps.
D-Union discovered that a high 1,409 listed Chinese companies reported currency-risk hedging in 2025, 13.5 percent up on the year prior. It further stated that this year, about 300 companies were already announcing forex hedging plans.
Liu added, Forex-risk hedging “would greatly improve corporate value and is more significant at a time when Chinese companies are ramping up overseas expansion.”
As it is, the Middle East war has thrown down the gauntlet of numerous expectations. And PBOC adjustments to push forward reserve requirements have rendered the sale of dollars in the forward market a shade more costly, freezing the gains of the yuan.
Hence, corporations have hoarded approximately $1 trillion in onshore dollar deposits and $2 trillion in overseas dollar resources, according to Soochow Securities. Therefore, if even a fraction of that were hedged or repatriated because of uncertainty, it would become a huge change in the flows in the Chinese forex market.
