China's central bank urged export-oriented firms to improve their forex-hedging ability after surveying 323 such enterprises, a report released by the People's Bank of China (PBC) said Friday.

 

China revalued its currency at a rate of 8.11 to the US dollar last July and the yuan to US dollar pegging system was switched to a basket of foreign currencies, which had lasted for more than a decade.

 

Firms have gradually got used to the new system and forex fluctuation. However, the scale of forex-hedging still ranks low, the report said.

 

For example, the contract value of forward exchange settlement and sales in China's banks only account for about two and four percent of the total, the PBC said.

 

On the one hand, since China has maintained a stable forex system, firms are not familiar with hedging tools, which limits their use of risk-avoidance methods. On the other hand, domestic banks also need to provide more hedging products, the report said.

 

China should speed up forex market reform and create more forex market players, transaction models and types so as to promote the development of forex derivatives and offer more channels for enterprises to avoid exchange risk, the PBC advised.

 

The PBC also urged commercial banks to expand forward exchange settlement and sales to more than one year as soon as possible and develop new financial products.

 

The survey shows that trade finance stands as the most frequently used hedging tool among domestic firms, apart from using derivatives and non-US currency, changing trade payment, increasing export prices and domestic sales proportions and purchasing forex investment products.

 

Users of derivatives, nevertheless, rose by one percentage point in 2005 from the previous year, among which forward exchange settlement and sales accounted for 91 percent of the total derivatives, according to the survey.

 

Firms that chose to increase export prices also rose from 4.2 percent in 2004 to 8.7 percent in 2005. However, since the proportion of enterprises that can bargain with their trade partners remains low, the PBC advised domestic firms to further improve their competence.

 

(Xinhua News Agency February 18, 2006)