China nudges banks to boost FX hedging as yuan strength squeezes exporters

China's foreign exchange regulator has quietly instructed banks to push more corporate clients into hedging currency risks, according to people familiar with the matter, as a steadily appreciating yuan weighs on exporters.

The informal guidance, known as window guidance, was conveyed in recent months by local branches of the State Administration of Foreign Exchange (SAFE), the people said. The aim is to raise foreign exchange hedging ratios — the share of clients' currency exposure that is protected.

The move signals that policymakers want companies braced for further yuan gains or sharper swings. The currency has climbed 4.3% this year and is trading near a four-year high against the dollar.

Some SAFE branches have offered subsidies to firms that increase hedging, including covering part or all of their currency options premiums, one source said. Banks in provinces with weaker trade activity were asked to lift hedging ratios to the national average, while lenders in export-heavy coastal provinces were encouraged to push ratios to around 40% or higher.

Chinese companies have flocked to derivatives for protection as the rising yuan has hurt some exporters for months and, more recently, as the war in Iran has stoked volatility. The total value of foreign exchange derivative contracts signed by corporates reached close to $1.4 trillion in the first half of this year, up about 40% from a year earlier, while the nationwide FX hedging ratio hit 35.3%, up 5.3 percentage points from the end of 2025, SAFE data showed.

China's export sector remains a bright spot, buoyed by strong demand for high-tech and AI-related products, providing vital support for an economy held back by sluggish domestic demand. Market participants expect yuan gains to slow, but they have already hurt exporters. Analysts at Goldman Sachs found foreign exchange losses in the first half hit their highest in a decade at around 70 billion yuan, or 4% of total earnings.

"However, these losses have remained manageable given the substantial earnings growth generated by these export-oriented companies," they added in a note published last week.

Financial regulators did not immediately respond to a request for comment. All sources requested anonymity because they were not authorised to discuss the matter publicly.