SHANGHAI, (Reuters) – Chinese businesses are scrambling to protect themselves against further devaluation. Analysts believe this could increase the pressure on the currency.

Portfolio outflows, rising U.S. dollars, and an uncertain economic outlook in China are the main reasons for the 4% plunge in the yuan last April.

The currency is also at risk from lopsided corporate hedging, which saw it touch a new 18-month low Friday. Global markets were also shaken by jitters.

Wang Dan (Chief economist at Bank (China), who called the yuan the official title, stated that “the expectation of further depreciation in renminbi has pushed more businesses to hedge against this risk.”

She stated that “By entering into a forward agreement, the demand for dollars increases immediately on the market, which puts further downward pressure on both the renminbi and the dollar.”

Wang said that exporters are still deciding what they will do with the proceeds. Some are converting more dollars to yuan, while others wait and hope for a better deal if the currency falls.

Forward transactions in Yuan/dollar nearly doubled from one year ago to 100 billion yuan ($15 trillion) in April. Official data revealed that this was the most significant month of trading since 2017.

While the data is not indicative of the direction, forwards that are non-deliverable are valued for a slowing in the yuan over a year. This suggests sentiment and businesses are more concerned about the global background and buying dollars.

Han Changming said that he used forward contracts as a hedge against the possibility of the Yuan depreciating further.

According to him, the United States has increased interest rates and China has been relaxing monetary policies. This means that “the trend towards yuan decline is very clear.”

There was also a rise in other hedging instruments, such as yuan forwards turnover in Hong Kong on April 25, when the spot market slumped and the yuan dropped in spot trade.

DIRECTIONAL BETS

China’s foreign regulator is stepping up its efforts to convince companies to hedge currencies using a market neutral mentality. Domestic financial institutions had for many months refused to make clear forecasts about the outlook of the yuan.

In reality, however, these positions can be hardly neutral. Reuters has seen client memos that show how banks continue to warn customers about the possible decline of their currency or at best keep it volatile.

Bank of Communications stated that it is intensifying its efforts to assist companies with managing currency risk.

Chongyi Zhangyuan Tungsten Co, a Chinese mining company, was recently advised by the lender to secure forward contracts for a cross-border loan of $7.5 million. These agreements were purchased dollars to protect against the possibility of a fall in yuan.

There are certainly exporters that sell dollars at spot rates to convert profits to the yuan. Additionally, some banks reported an increase in dollar selling on the forward market.

However, analysts believe that corporate behaviour could be contributing to this downward trend in spite of no formal opposition from authorities.

Wang Tao, chief economist at UBS China said that hedge positions had been light up until two weeks ago. However, many exporters might have been caught unaware by this latest move.

The momentum for the CNY Depreciation could be boosted by more market participants who hedge the risk that further CNY depreciation might occur.