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

China’s foreign exchange regulator has recently instructed banks to encourage more corporate clients to hedge currency risks, aiming to shield exporters from the yuan’s ongoing appreciation, according to sources familiar with the situation. This step, known as window guidance, has been issued in recent months, highlighting authorities' worries over foreign exchange losses among exporters, a key pillar of an economy that has been experiencing subdued growth.

The push for hedging also indicates policymakers' desire for companies to be ready for further yuan appreciation or heightened volatility, with the renminbi having surged 4.3% this year and approaching a four-year high against the dollar, as Bloomberg News initially reported.

Banks were directed by local branches of the State Administration of Foreign Exchange (SAFE) to raise foreign exchange hedging ratios, the proportion of clients' currency exposure that is protected. Some branches even provided subsidies to firms that increased their hedging, covering either part or all of their currency options premiums.

Export-oriented coastal provinces were advised to push hedging ratios to around 40% or higher, while those in provinces with relatively weaker trade activity were expected to reach the national average level, according to the sources. The anonymity of these sources was maintained because they were not authorized to speak publicly on the matter.

As a response to the yuan's steady rise, Chinese companies have been rapidly turning to derivatives for protection against currency exposure. The value of foreign exchange derivative contracts signed by corporations hit nearly $1.4 trillion in the first half of the year, a 40% jump from a year ago. Meanwhile, the nationwide foreign exchange hedging ratio climbed to 35.3%, up 5.3 percentage points from the end of 2025, as per SAFE data.

Despite China's export sector performing robustly, driven by strong demand for high-tech and AI-related products, currency gains have been detrimental to exporters. Goldman Sachs analysts noted that foreign exchange losses in the first half of the year reached their highest level in a decade, accounting for about 70 billion yuan or 4% of total earnings, yet these losses have been manageable given the substantial earnings growth for these export-oriented companies, according to a note released last week.