Summary of Key Points
Since July, A-share listed companies have been releasing their semi-annual performance forecasts in large numbers. The appreciation of the RMB has caused many export-oriented enterprises to suffer from exchange losses, which has become a significant reason for increased revenue without corresponding profit growth. Although companies are becoming more aware of hedging and have increased their hedging ratios, there are inherent limitations to these tools. Experts in the industry believe that businesses need to move away from the mindset of betting on one-way fluctuations in exchange rates and instead establish a comprehensive exchange rate management system that combines "natural hedging," "asset-liability matching," and the use of derivatives. The ability to manage foreign exchange effectively directly determines the quality of converting overseas revenue into RMB profits.
I. Exchange Losses Erode Export Enterprises' Profits: Revenue Increases, but Money Decreases
The impact of the RMB appreciation on export enterprises can be simply described as follows: "The dollars or euros earned from selling goods become worth less when converted back into RMB." For example:
- Meng Baihe: This company has a high proportion of its revenue coming from overseas markets. Although its revenue grew steadily in the first half of the year, the appreciation of the RMB led to significant exchange losses, resulting in a 93% to 100% decrease in net profit year-on-year (almost no profit).
- Linglong Tire: The situation is even more extreme. While its main business improved in the first half of the year, it incurred exchange losses of approximately 342 million yuan, compared to a gain of 691 million yuan in the same period last year. This negative difference of 1033 million yuan completely eroded its operating profit, causing its net profit after deducting non-recurring items to drop by 99% year-on-year.
Why does this happen? Export enterprises receive payments in foreign currencies, which they must convert into RMB for financial accounting purposes. When the RMB appreciates, the same amount of foreign currency converts to less RMB, resulting in a decrease in reported profits.
II. Rising Hedging Ratios, but Not a Panacea
In response to exchange rate fluctuations, companies are increasingly using hedging tools (such as forward contracts to lock in exchange rates in advance). Data shows that:
- The total value of hedging agreements signed by companies in the first half of this year was nearly 1.4 trillion US dollars, a 40% increase from the previous year; the hedging ratio reached 35.3%, up 5.3 percentage points from last year.
However, why do companies still suffer losses despite hedging? There are several limitations to hedging:
1. Inability to Fully Cover Risks: For example, even with forward contracts, it is impossible for the tools to completely offset all potential fluctuations.
2. Transaction Costs: Hedging involves fees paid to banks, which reduce profits.
3. Partial Hedging: Most companies only hedge a portion of their foreign currency income, leaving the remaining amount exposed to exchange rate risks.
4. Time Differences: The value of hedging tools changes over time, which can still result in losses on the books.
For instance, if a company receives 100 million US dollars a year ago and hedges it with a forward contract, changes in the exchange rate after one year could lead to differences in the fair value of the hedge, resulting in additional losses.
III. Exchange Rate Risk Management: Focus on Managing Exposure, Not Speculating on Fluctuations
Many companies make the mistake of trying to predict whether exchange rates will rise or fall, hoping to profit if they guess correctly and lose if they do wrong. However, industry experts emphasize that the key is not to bet on fluctuations but to manage the "foreign exchange exposure."
What is "exposure"? It refers to the total amount of foreign currency assets or liabilities a company holds (such as unconverted US dollar income). The larger the exposure, the greater the impact of exchange rate changes. Historical experience shows that companies that fail to adjust their exposures in the early stages of RMB appreciation suffer significant losses; however, by adjusting hedging strategies and exposures later on, the losses can be mitigated. As long as companies use foreign currencies for transactions, it is impossible to eliminate all risks completely. Therefore, the focus should be on keeping exposure within a tolerable range rather than attempting to accurately predict exchange rates.
IV. Future Directions: Establishing a Comprehensive Protection Network
Relying solely on hedging tools is not enough; companies need a more systematic exchange rate management approach:
1. Natural Hedging in Operations: For example, using US dollars for both revenue and costs (such as purchasing raw materials from the United States) to offset the impact of dollar fluctuations on profits.
2. Asset-Liability Matching: Borrowing in US dollars and repaying with US dollar income to avoid increased repayment pressures due to exchange rate changes.
3. Optimizing Settlement Timing: For example, accelerating the conversion of foreign currency income into RMB when the RMB is appreciating.
4. Flexible Use of Derivatives: Using derivatives in conjunction with the other strategies to supplement hedging efforts.
CITIC Securities points out that the stability of profits for companies expanding overseas has shifted from focusing on growth in overseas revenue to emphasizing the ability to manage foreign exchange effectively. Good management can convert more of overseas revenue into RMB profits; poor management, on the other hand, can lead to significant losses due to exchange rate fluctuations.
In summary, for export enterprises, exchange rate volatility is a common occurrence. Instead of betting on exchange rate movements, it is more effective to invest in establishing a comprehensive management system, as this is the key to achieving long-term profit stability.