Chinese firms may for the first time face major currency risks in the coming year - not only because the yuan is rising but because officials are shifting more responsibility for risk from the government to companies.
Corporate executives say they are aware of the risks but often lack access to effective hedging instruments, or even an understanding of them, so they look at other ways to reduce their dollar exposure, such as seeking settlement in another currency.
The government used to bear the costs of currency volatility, but companies must now jump into the water and learn how to swim, said economist Cheng Manjiang at Bank of China International.
A year after Beijing freed the yuan from a peg to the dollar and revalued it by 2.1 percent on July 21, 2005, appreciation remains slow. The yuan has risen only 1.4 percent since the revaluation to 8.0016 early on Tuesday.
But economists and foreign exchange dealers believe the pressure of a massive trade surplus will prompt authorities to loosen the reins and allow the yuan to rise 3 to 7 percent in the second year of its managed float.
Beijing is also moving to abolish export tax rebates for lower-value-added industries, so raising the cost of shipping products abroad.
The government is privatizing exports, so it is cutting export tax rebates among other steps to push firms to learn how to weather the storms of currency volatility, said Yang Bin, senior manager at Pudong Development Bank.
The State Administration of Taxation lists a wide range of goods for which the authorities have cut or scrapped export tax rebates since the start of 2005, from coal and gasoline to fertilizer and metals. More cuts are expected.
This is a sharp contrast to the late 1990s when Beijing offered rebates for most exports because a strong yuan against other regional currencies during the Asian financial crisis was making it harder to sell Chinese goods.
At that time, export rebates typically matched the 17 percent value-added tax on sales within China.
Major Chinese exporters with low-end products such as textiles, China's single-biggest foreign exchange earner, are most vulnerable to a rise in the yuan.
Beijing has introduced some financial instruments to help companies cope with an increasing need to hedge their financial exposure.
From August 2005, Beijing allowed a wide range of banks to trade yuan forward contracts. But the onshore forward market remains thin, partly because of unfamiliarity among both banks and their corporate customers.
We have been on high alert for possible exchange rate losses in particular since last July's revaluation, said Yang Min, a spokesman for Shanghai Lansheng Co., a major exporter of textiles, toys, shoes, paper and plastic products.
We have been converting our foreign exchange income into the yuan as quickly as possible, and try to make sales that take into consideration future yuan appreciation, but we still lack other tools to hedge risks for now.
An official at China International Marine Containers (Group) Co., the world's largest shipping container maker, which earns over 80 percent of its revenue in U.S. dollars, said the firm was unable to hedge some currency risks.
We are seeking to reduce the proportion of dollars in our assets and trying to obtain more yuan-denominated deals, spokesman Wang Xinjiu said. Hedging is one of our choices, but it cannot cover all our hard currencies.
Even Bank of China, the country's top foreign exchange lender, complained in a share prospectus last month: Our bank's ability to manage foreign exchange risks is limited by a lack of available hedging tools and currency control.
A central bank survey, reported last month by the official International Business Daily, found a growing number of businesses in key manufacturing provinces, including Fujian, Liaoning and Guangdong, were cutting risks by using non-dollar currencies in settlement.
But this is not possible for many exporters selling to the United States or the developing world.
Commerce Ministry analysts have suggested companies expand their procurement of raw materials abroad, and even transfer some of their operations overseas, to reduce currency risk. This is likely to happen longer term, but is beyond the capabilities of many firms at present.
An increasing number of exporters are taking out long-term trade loans to ensure credit during currency fluctuations, a step forward from a few years ago, analysts say. But the frequent use of this tool threatens to create new bad loans for Chinese banks.
Exporters are shifting some of their risks to domestic banks, which have so far done only a little to hedge their foreign exchange positions, said banking analyst Luo Yi at Merchants Securities.