SHANGHAI/SINGAPORE, Aug 31 (Reuters) – Chinese exporters are employing a complex currency swap strategy to avoid converting their dollar earnings into yuan due to concerns about potential losses in the U.S. currency, according to official data and conversations with companies. China’s state banks are involved in some of these swap transactions, allowing exporters to exchange their dollars for yuan. This suggests that the country’s currency regulator is comfortable with these trades, even as authorities attempt to control the pressure on the yuan in spot markets. Exporters, like Ding, a Shanghai-based businessman, are holding onto their dollar earnings and are hesitant to sell and convert them into yuan, which has recently reached nine-month lows. “My fellow exporter friends and I have been discussing whether we should use foreign exchange swap trades to obtain yuan,” said Ding, who trades in electronics and toys. “The main concern is that the price of the dollar continues to rise.” The yuan has depreciated by over 5% against the U.S. dollar this year, including a 2% drop this month alone, and is being further weakened by foreign capital outflows from the struggling economy. The swaps allow exporters to deposit their dollars with banks and receive yuan in return, but through a contract that will eventually reverse the flows and return their dollars. However, while these swaps remove a much-needed source of dollar supply in spot yuan markets, analysts believe that Chinese monetary authorities cannot force exporters to convert their dollars. Chinese companies have swapped a record $31.5 billion for yuan with commercial banks in the onshore forwards market in July alone, and a total of $157 billion so far this year, according to the country’s currency regulator. Ding initially planned to convert his dollar holdings when the yuan weakened beyond 7-per-dollar, a level the local currency has only surpassed three times since the 2008 Global Financial Crisis. However, he changed his mind as expectations grew that the Federal Reserve would maintain higher U.S. interest rates for a longer period of time, and due to the persistent weakness in the yuan, whose yields are falling as China eases monetary policy to support its struggling economy. “The growing divergence in monetary policy is the main reason behind this trend,” said Gary Ng, senior economist for Asia Pacific at Natixis. “As there is unlikely to be any fundamental change in the short term, the gravity of yield differentials will drag down the yuan and prompt exporters to bet on the dollar.” HOW THE SWAP WORKS Rising U.S. yields and the widening gap with Chinese rates have also caused rates in the currency forwards market to flip, to the extent that exporters have no incentive to lock in a forward rate to sell their dollars. One-year yuan is quoted at 7.02 per dollar, compared to a spot rate of 7.29. Traders say that the State Administration of Foreign Exchange allows sell-buy dollar-yuan swaps if companies use their own funds. When exporters swap…
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