China urges more FX hedging as strong yuan hits exporters, sources say

• The yuan has risen 4.3% in 2026 and is trading near a four-year high against the dollar, causing exporters' FX losses to hit approximately 70 billion yuan (4% of total earnings) in the first half, the highest in a decade according to Goldman Sachs
• Corporate foreign exchange derivative contracts totaled nearly $1.4 trillion in the first half of 2026, up 40% year-over-year, while the nationwide FX hedging ratio reached 35.3%, up 5.3 percentage points from end-2025
• Some SAFE branches are providing subsidies to companies that increase hedging, including covering part or all of currency options premiums, with coastal provinces targeted to reach 40% or higher hedging ratios

Summary

China's State Administration of Foreign Exchange (SAFE) has issued informal "window guidance" to banks in recent months, instructing them to encourage corporate clients to increase foreign exchange hedging amid the yuan's strong appreciation. The currency has risen 4.3% this year and is trading near a four-year high against the dollar.

Key Developments:

• Local SAFE branches are urging banks to raise FX hedging ratios (the proportion of currency exposure that is protected)
• Some branches are offering subsidies to companies, including covering currency options premiums
• Banks in export-oriented coastal provinces are encouraged to push hedging ratios to 40% or higher
• Banks in provinces with weaker trade activity should raise ratios to national average levels

Market Data:

• Foreign exchange derivative contracts signed by corporates reached nearly $1.4 trillion in H1, up 40% year-over-year
• Nationwide FX hedging ratio hit 35.3%, up 5.3 percentage points from end-2025
• FX losses in H1 reached approximately 70 billion yuan (4% of total earnings), the highest in a decade according to Goldman Sachs

Context:

The move highlights authorities' concerns about export sector profitability, which represents a bright spot in China's otherwise sluggish economy driven by weak domestic demand. The export sector is currently performing strongly due to robust demand for high-tech and AI-related products. While yuan appreciation has pressured exporters, analysts note these losses remain manageable given substantial earnings growth from export-oriented companies.