Business
Yuan’s Decline Triggers Fears on Leveraged Bets
BEIJING – The sudden slide of the Chinese currency over the last week has raised fears that the yuan is nearing levels that could trigger an unwinding of billions of dollars in highly leveraged bets on the currency’s appreciation.
Traders and strategists say a portion of the yuan’s recent decline can be attributed to investors looking to get out of trades before losses soar.Daily trading volume in the yuan has exploded recently, tripling to $120 billion a day since 2010, when China allowed trading in its tightly controlled currency. The yuan is now the ninth-most traded currency in the world, according to the Bank for International Settlements, rising from 17th two years ago.
In the past year, trading in derivatives tied to the currency have soared as investors bet on a continued rise in the yuan. According to Deutsche Bank, approximately $250 billion worth of these derivative contracts were traded in 2013, the first year these products took off. Already in 2014, between $80 billion and $100 billion have been traded, the bank says.
The currency, which is also known as the renminbi, is up 33% since 2005. And because the currency is tightly controlled by the Chinese government, volatility is among the lowest in Asia, making the bet seem even less risky.
On Tuesday, the offshore yuan hit 6.1115 against the greenback, sharply up from 6.0984 the day before. Earlier in the day, the currency touched an intraday peak of 6.1250, its highest since it reached 6.1272 on Aug. 22 and the yuan’s biggest daily drop since Jan 28, 2011. China’s stock market suffered its biggest fall in five months, dropping 2.1%, putting its overall decline at 3.5% since the beginning of the year.
Individual investors and small- and medium-size businesses were among the biggest buyers of options that would profit from appreciation in the yuan, currency analysts say. They bought structured investment products that magnified gains but could lead to big losses if the yuan fell below certain levels. The rising yuan coupled with higher interest rates inside China led even more investors to buy yuan, pushing the currency higher.Ju Wang, senior Asian currency strategist at HSBC in Hong Kong, said losses on these products were small so far, but if investors believed they would grow significantly if the currency continued to depreciate, “they might take a mark-to-market loss and unwind contracts. So it all depends on expectations.”
Ms. Wang said that small- and medium-size Chinese exporters have been big buyers of derivatives because they allowed them to hedge against the rising yuan, which makes their goods more expensive to sell overseas and their revenues, which come in foreign currencies, smaller. In many cases, Ms. Wang said, the businesses are losing money in their operations but make profits because of the hedges, which generate a monthly income.
Greg Yu, the Asia ex-Japan head of structuring and solutions group at J.P. Morgan in Hong Kong, said wealthy clients of private banks also bought these products, mostly in Hong Kong, the biggest market for trading in the yuan, and Taiwan. Products designed to profit from the rising yuan are widely advertised by banks in Hong Kong, where bank deposits held in yuan are up by 50% in the last 18 months to 900 billion yuan.
The derivatives that underlie these products are based on the so-called offshore yuan, which trades in Hong Kong and isn’t subject to the strict controls on movements by China’s central bank for yuan that trade in the mainland. While the offshore yuan trades freely, it is broadly tied to the yuan price inside China.
The most popular among the derivative products tied to the yuan is the ‘target redemption forward.” The product is a leveraged bet that pays out every month that the currency keeps rising. But when it falls to a specific level, losses begin to mount quickly.Geoff Kendrick, head of foreign exchange and rates at Morgan Stanley, says that these contracts vary widely in value and in length. He estimates that banks have sold these target redemption-forward products with notional value totaling $350 billion since the beginning of 2013.
He says that if you take the $350 billion notional outstanding and assume the average contract has a year left, then once the yuan passes a specific threshold versus the dollar, every decline of 0.1 yuan against the dollar, would cost buyers approximately $500 million a month. That means roughly $6 billion in losses. The contracts are opaque so there is no way to know exactly what price the yuan needs to hit for the losses to begin, but Mr. Kendrick says a reasonable estimate is from 6.15 to 6.35 yuan to the dollar.
Mr. Kendrick says he believes the Chinese currency’s move will be contained but “we do acknowledge the risk of a volatile move higher in the cross, especially given the large amount of structured product traded over the past few years.”
Greg Matwejev, director of FX hedge-fund sales at brokerage firm Newedge Group SA in Hong Kong, said most hedge funds in the region were betting on a stronger yuan as well. “It was like free money,” he said. But the fast move downward forced them to sell quickly. “There is still a lot more pain before this trade shows signs of stabilizing. Very few funds are contrarian on this trade and all are seeing red at the moment,” he said.
He said if the yuan falls further, investors will be forced to sell their yuan and buy U.S. dollars, adding that if the currency moves beyond today’s trading levels of 6.12, it “will set off more panic U.S. dollar buying.”
– WALLSTREET JOURNAL
Nigeria’s economic fortune is benefiting from the Middle East crisis, as the impact of capital inflows from stronger crude oil earnings has seen her foreign reserves climb to record $53.1 billion, beating the $51.04 billion year-end target.
Data available on the Central Bank of Nigeria’s (CBN) website indicated that the reserves closed at $53.1 billion on August 24, which is the highest level in almost 18 years.
Any analyses of the growth shows that the difference in reserves position places the Nigerian economy in good stead, because it can cover over 12 months import.
It is noteworthy that Nigeria’s external reserves fuel the CBN’s capacity to support the local currency and meet external obligations, have continued to rise steadily, since the face-off between the United States and Iran.
Further analysis of the data displayed by the CBN showed that the liquid portion of the external reserves stood at $52.5 billion.
Biztellers reports that Brent crude traded around $87 per barrel, within the week, well above Nigeria’s 2026 federal budget benchmark of $64.85.
READ ALSO: Shell Endorses Regional Action Plan for Safe Helicopter Services
With the Middle East crisis not showing signs of abating, analysts believe the price rebound would largely bolster Nigeria’s fiscal revenues.
The line of thought is popular among those who know, because as a crude oil exporter, Nigeria will continue to earn more petrodollars, which they argue would support the domestic currency – naira’s stability, while pumping the volume of external reserves.
In its economic projections for 2026, the CBN targeted stronger oil earnings, foreign exchange market reforms and improved external capital inflows to achieve the year-end reserves projection.
According to analysts, the current reserves position reinforces the steady growth in Nigeria’s external buffers.
The founder/Chief Executive Officer of the Centre for the Promotion of Public Enterprise (CPPE), Dr Muda Yusuf, earlier hinted at a positive outlook for Nigeria’s external reserves as he does not see anything derailing the forex and fiscal reforms that have brought about stability and improvement in external reserves, as reported by The Nation.
Yusuf said: “Well, the outlook for me is positive because I don’t see anything derailing these forex reforms, fuel subsidy etc. It is these reforms that have brought about stability.”
The CBN data further showed that Nigeria’s external reserves have maintained a steady upward surge in recent months.
The reserves started June at $49.80 billion and crossed the $50 billion mark by June 5, reaching $50.12 billion.
On June 15, reserves had increased further to $50.81 billion before rising to the current position. The reserves stood at $51.9 billion on July 31, and continued.
The sustained increase reflects stronger foreign exchange inflows and improved liquidity conditions in the country’s external sector.
The CBN Governor, Olayemi Cardoso, said: “This strong buffer continues to reinforce investor confidence in the Nigerian economy and support exchange rate stability.”
The CBN’s decision to clear over $7 billion unsettled FX backlogs raised investors’ confidence in the economy, supporting dollar inflows and foreign reserves accretion, Cardoso added.
The CBN boss had explained that although he had no idea where the fund for the backlog clearance would come from, when he assumed office, he believed it was the right thing to do, and gave investors his word.
He said: “Credibility is at the heart of any central bank. If you don’t have credibility, people do not trust you and they do not invest in your economy. When I took office, I made a promise we would pay the backlog, the verifiable backlog of monies that were owed by Nigeria to third parties.
“And it was, at the time, estimated at over $7 billion US dollars. And to be honest with you, I had no idea how I was going to do it, but I just felt it was not something to be negotiated.”
Cardoso explained that Nigeria needed to ensure that its integrity is maintained. Analysts believe the higher reserve level could enhance the CBN’s capacity to support exchange rate stability and meet external obligations.
Up to 30% equity in the upcoming Dangote Refinery in Kenya, has been placed on the table for East African countries, which makes about $1.5 billion worth of the planned project available to regional investors.
David Ndii, Kenyan President William Ruto’s economic adviser, disclosed this on Thursday at a capital markets forum in Nairobi, where he said Kenya would take a 10% stake while Ethiopia and Rwanda had also expressed interest.
Dangote’s planned refinery is expected to be developed in Lamu, a coastal town in southeastern Kenya, though the project was initially proposed for Tanga in Tanzania.
According to the billionaire industrialist, the decision to move the proposed location to Kenya was informed by commercial and technical considerations.
Ndii disclosed that Kenya’s proposed 10% participation would be worth approximately $500 million.
READ ALSO: Shell Endorses Regional Action Plan for Safe Helicopter Services
He said the combined regional participation could amount to about $1.5 billion, with Dangote prepared to support the project if some participating countries are unable to commit as crude off-takers.
“The total for the region is about $1.5 billion,” he said. “I don’t actually see a challenge in doing that, and if some of them are not off-taking we will backstop.”
The proposed regional participation would give East African countries a direct equity interest in a major energy infrastructure project while potentially securing access to refined petroleum products for participating markets.
The United Nations Geoscheme (UNG) for Africa defines Eastern Africa as comprising 18 sovereign countries, alongside two French overseas territories, meaning the proposed 30% allocation could potentially involve a broader regional investor base beyond Kenya, Ethiopia and Rwanda.
The Nigerian authorities have been called upon to focus on strengthening domestic refining capacity.
The Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) made the call in a communiqué issued at the end of the three-day PENGASSAN Energy and Labour Summit (PEALS 2026).
It stressed the need for adequate protection for refineries operating in the country.
The PENGASSAN said Nigeria must reduce the economic inefficiency of exporting crude oil while importing significant volumes of refined petroleum products by creating an environment that supports domestic refining and other value‑adding activities.
The communiqué, signed by the union President, Festus Osifo, and General Secretary, Jerry Amah, stressed the need to protect refineries, including Dangote Refinery and Waltersmith Refinery.
The association said the expansion would enable Nigeria to retain a greater share of the value generated from its petroleum resources while creating jobs, conserving foreign exchange and stimulating industrial development. PENGASSAN linked the growth to wider opportunities in petrochemicals, gas processing and other downstream activities.
READ ALSO: Umar Cautions Against Irregular Policies in Nigeria’s Oil Industry
The communiqué reads in part: “The summit called for sustained policies and investments to expand Nigeria’s domestic refining capacity and reduce the economic inefficiency of exporting crude oil while importing significant volumes of refined petroleum products. The need to protect refineries (such as Dangote Refinery, Waltersmith Refinery, etc.) within Nigeria’s jurisdiction was emphasised.
“Nigeria must progressively retain more value from its petroleum resources through domestic refining, petrochemicals, gas processing and other value‑adding activities capable of generating employment, conserving foreign exchange and stimulating industrial growth.
“Ultimately, the strength of Nigeria’s oil and gas industry will not be measured merely by the resources beneath the ground, but by the projects delivered, the value created, the Nigerian capabilities developed, the decent jobs sustained and the prosperity generated for the Nigerian people.”
The association also warned that abrupt policy changes, overlapping mandates, repetitive approvals and conflicting directives increase the cost of doing business and weaken Nigeria’s competitiveness for global energy capital.
The PENGASSAN called for faster regulatory approvals, digitalised processes and clearer timelines, arguing that the effectiveness of regulation should be measured by its impact on investment, production, government revenue, job creation and national value rather than simply by the number of licences or approvals issued.
On gas, the PENGASSAN advocated an integrated approach to developing Nigeria’s more than 215 trillion cubic feet of proven reserves, including investments in processing facilities, pipelines, storage, LNG, LPG and CNG infrastructure. It said gas should be deployed more aggressively for power generation, manufacturing, transportation, fertiliser and petrochemical production.
The association also urged stronger protection of workers’ rights, occupational safety and employment during mergers, acquisitions, divestments and asset transfers, saying sustainable investment requires skilled and fairly treated workers and that increased production must not come at the expense of workers’ lives and wellbeing.
In addition, the PENGASSAN said the next phase of Nigeria’s petroleum industry must focus on execution with measurable targets and clearly assigned responsibilities to ensure policies translate into projects, production, investment and sustainable employment.
‘Over N20m Lost’ — Inferno Razes Abuja Building Materials Market After Midnight Restocking
Nestoil Boosts Oil Production with $28m Drilling Fleet
172 HCDTs Incorporated — NUPRC
Nigeria Beats 2026 Foreign Reserves Target, Hits $53.1b
Dangote Dangles 30% of $17 Billion Refinery Before East Africans
Shell Endorses Regional Action Plan for Safe Helicopter Services
Trump’s Family Unveils New Cryptocurrency Platform
Senate Denies Receiving Petitions Against Tinubu’s Ambassadorial Nominees
Dangote Cement Lights Up Benue Host Communities With CSR Initiatives
Reps Recommend 3-year Jail Term For Aviation minister
Tems Sets New Record On Billboard Hot 100 Chart
