China firms' hedging activities spike amid trade war uncertainty

Shanghai

CORPORATE China's hedging activities spiked over the past two years as the Sino-US trade war and a slowing economy prompted companies to embrace the country's rapidly growing derivative market to reduce uncertainty, data shows.

The number of China-listed companies using hedging tools such as futures and options to limit market risks exceeded 500 at end-2019, up 43 per cent from two years ago, public data gleaned by risk-management consultancy D-Union shows.

Still, they account for just 13 per cent of China's nearly 4,000 publicly-traded companies. In the United States, roughly 80 per cent of S&P 500 companies regularly engage in hedging activities.

The rapidly changing geo-political climate is pressing Chinese companies to better manage risks, said Liu Wencai, D-Union's founder. China's deregulation of its financial market is also fuelling demand for risk-hedging, Mr Liu added.

"Over the past year, we've seen huge foreign inflows into China's bond and stock market, and that will also boost demand for financial derivative tools," Mr Liu said.

Risk hedging was unnecessary when the government determined the prices of most resources, but that has changed with Beijing allowing market forces to play a bigger role in setting the prices of bonds, stocks, commodities and currency.

Big companies, defined by D-Union as those with revenues exceeding one billion yuan (S$194 million), are the dominant users of hedging tools.

Hedging practices are also more popular among sectors most vulnerable to volatility in resource prices or world trade conditions, such as chemicals and electronics, the data shows.

US President Donald Trump launched a tariff war against China in July, 2018, roiling financial and commodity markets, while dealing a blow to China's economy. China's GDP growth slowed to a 30-year-low in 2019.

Relations between the world's two largest economies are, however, showing signs of improvement, with a phase one trade pact between them expected to be signed on Jan 15.

Corporate China's hedging activities have also been buoyed by a boom in derivative innovation, Liu said.

China launched new products at a record pace in 2019, rolling out over a dozen derivative tools, including Urea futures, iron ore options and gold options.

As global index publishers such as MSCI and FTSE Russell include Chinese stocks or bonds in their benchmarks, foreign investors are pressing for more hedging tools in China.

China has said it will start trial trading in interest rate options next month to meet risk-management demand in an increasingly liberalised interest rate market. REUTERS