Chinese banks struggle to hedge bloated dollar holdings

Chinese Banks Facing Losses on Dollar Assets as Yuan Rises

From Xinhua News Agency
via People's Daily Online, Beijing
Wednesday, August 23, 2006

http://english.people.com.cn/200608/23/eng20060823_296115.html

Major Chinese banks, with an estimated $80 billion in foreign currency assets, will face losses if the yuan keeps rising in value, bank executives said Wednesday.

Banks holding U.S. dollars would "definitely suffer losses as the renminbi, or the yuan, continues to appreciate," Pang Xiusheng, the China Construction Bank's chief finance officer, told Xinhua.

The Bank of China would pay close attention to the yuan's exchange rate and its effect on financial management, said Zhu Min, a BOC executive assistant president.

The No. 2 state lender, listed in Hong Kong and Shanghai, planned to "further reduce" its foreign exchange holdings by the end of the year, Zhu said.

The Bank of China's foreign currency assets, believed to be the biggest among major domestic banks, were a longtime concern for its stock investors, especially with the yuan rising by greater margins lately.

Under China's currency controls, banks have been forced to buy the majority of foreign currency earnings by domestic exporters, piling up hefty U.S. dollar and other foreign currency-denominated assets.

U.S. manufacturers argue that the yuan is undervalued by as much as 40 percent, making Chinese goods cheaper in the United States and American products more expensive in China and hurting the U.S. job market.

In July last year China revalued the yuan by 2 percent against the U.S. dollar and abandoned its peg to the dollar in favor of a restricted float against a group of foreign currencies.

The yuan has since risen by 3.7 percent against the U.S. dollar. Its appreciation was typically sharp last week, rising 123 basis points last Wednesday. On Wednesday, the official exchange rate was at 7.9703 per dollar.

A China Banking Regulatory Commission report says as the yuan appreciates, though slowly, banks are finding it increasingly difficult to find foreign currency buyers to hedge risks through currency swaps and other financial tools.

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