FX

Managing FX Risk in Asia: When Onshore Hedging Is the Right Call

By January 29, 2025No Comments

The benefits of a hedging method that may be underutilized by corporates managing FX risk in China and elsewhere.

The ability to hedge exposure to currencies onshore in China and other Asian markets instead of being limited to using offshore, non-deliverable forwards (NDFs) allows corporations to potentially reduce the costs of managing FX risk. That takeaway emerged during a presentation by MUFG at the NeuGroup for Tech Treasurers 2024 Tech Summitt sponsored by the bank in November.

  • “Having the setup so that you can access the onshore market when it is in your favor is absolutely something that we’re seeing more and more corporates do,” said MUFG’s Matthew Fennessy, Head of Global Subsidiary Sales and Acquisition Strategy in Asia.
  • There are, however, challenges to overcome before you can take advantage. They include global time zones, know-your-customer (KYC) hoops and documentation of the transactions being hedged. These are among the reasons not all corporates make use of onshore hedging.

Why it works. For corporates that can access onshore FX markets (companies with subsidiaries in China and other countries with restricted currencies), the opportunity to reduce hedging costs arises from exchange rate disparities between onshore and offshore markets. Some of the disparities have surfaced as interest rates in the U.S. rose.

  • When those disparities balloon, windows open that make hedging onshore a clearly better choice. Mr. Fennessy provided the example below comparing the USD/CNY (onshore) rate and the USD/CNH (offshore) rate. The difference shown is what FX traders would call 9.9 “big figures.”

Given those rates, a U.S. corporate converting 500 million Chinese yuan to USD via a 1-year forward would face this math:

  • CNY: 500 million / 6.9968 = $71,461,239.42
  • CNH: 500 million / 7.0958 = $70,464,218.27
  • Benefit of $997,021.15 with onshore hedging.

Be prepared. “In the case of China, we’ve seen the difference between onshore and offshore one-year hedges diverge by 12 big figures at times in the past few months,” Mr. Fennessy said.

  • “As more uncertainty continues to play out in this space, we expect more instances of this divergence continuing and even expanding. Make sure that you are set up to be able to access these markets when these windows do open,” he advised.
  • “As we face uncertainty around cross-border trade and the impact on global currencies, we’re seeing more and more dislocation between onshore and offshore markets in place like China, India, Taiwan and Thailand.
    • “If clients have established the necessary partners to enable them to access both markets, it is simply a matter of assessing both onshore and offshore pricing at the time of hedging and choosing the more favorable pricing.”

Timing is everything. Changing market dynamics mean corporates looking to hedge in Asia may find what made sense three months ago no longer holds. Mr. Fennessy gave the example of a corporate client in the tech space buying a factory in Taiwan priced in TWD.

  • “When they initially looked at the transaction in June, the market setup was such that if they had hedged at that point then the onshore market would’ve been a cheaper method than offshore,” he said.
  • “As it happened, the transaction was put on ice for a couple of months; when the client came back in September to revisit the transaction the market had switched and now it was cheaper to hedge offshore than it was onshore.”
  • Another complicating factor: strength in the U.S. dollar and how it plays out in the offshore vs onshore markets.

Not so fast. Taking advantage of the disparities in onshore and offshore currency rates requires work by treasury teams and may not be worth the time and effort for some companies. For starters, it may require changing the FX risk management policy.

  • More importantly, corporates have to work with a bank in country to get their onshore entities through KYC and other regulatory hurdles. And they may have to document the transactions they are hedging for local authorities. This all takes time.
  • Time of day is another factor, Mr. Fennessy said. “You can get a price from MUFG Manila or MUFG China. And you can access that on behalf on your onshore entity. The problem is you need to be doing that at 10 p.m. at night on the East Coast. And so that’s where the challenge is—that these markets have an open and close.”
Justin Jones

Author Justin Jones

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