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Expert suggests Chinese firms hedge

06-01-2011 09:11 BJT

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Many Chinese companies are at the whim of changing prices in the commodities market. They face risks and uncertainty. Experts now suggest those companies affected by fluctuations in the market, use hedging as an effective tool.

The Smiling Curve is an illustration of value-added potential of different components in the value chain. The concept was first proposed by Stan Shih, the founder of Acer in 1992.

Both ends of the value chain command higher values added to the product, than the middle part of the value chain. If presented in a graph with a Y-axis for value-added and X-axis for value chain, the resulting curve appears to be a smile. But Chinese companies can hardly smile while facing such low-added value and vulnerability to international commodity prices.

Chang Qing, president of Jinpeng Futures Company, said, "The services sector takes up around 70 to 80 percent of the GDP in developed countries, and the rest takes up a small proportion. But the substantial economy led by the processing industry in China takes the majority of our economic growth. What is terrifying is that sometimes the price of raw materials rises, but the price of production does not rise and even declines."

In order to be more independent from the fluctuations of the international commodity market, and minimize the global uncertainties, experts suggest companies use hedging.

Hedging is an investment position intended to offset potential losses that may be incurred by a companion investment. US investors have been using hedging for a long time, especially in the crude oil sector. But large Chinese firms seldom use hedging as a tool to avoid risks.

"Many Chinese companies, especially those in the petrochemical and construction sectors, need to import a large amount of commodities. They can choose hedging for their commodity futures," said Chen Yulu, vice president of China International Finance Society.

But experts warn that the main purpose for using hedging is to averse risks, not to make profits. There were some Chinese companies who suffered huge losses when trying to cash in on hedging.

Editor:Shi Jierui |Source: CNTV.CN

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