Photo of Chen Xi, Alibaba.
Two-way volatility in RMB exchange rates has become a normal phenomenon over recent years, having a major impact on customers of Alibaba. The FX rate locking solution here enables its clients to sign forward foreign exchange rate contracts with the bank online and lock the exchange rate of the expected cash flow (fixed amounts and fixed currencies) within a certain period.
Chen Yazhou
Senior Treasury Manager
Alibaba B2B
Hangzhou, China
Alibaba is a Chinese multinational conglomerate specialising in e-commerce, retail, Internet, AI and technology. Founded in 1999, the company provides consumer-to-consumer, business-to-consumer and business-to-business sales services via web portals, as well as electronic payment services, shopping search engines and cloud computing services.
FX rate locking solution addresses currency volatility for Alibaba customers
The challenge
Over recent years, with the internationalisation of RMB, two-way volatility in RMB exchange rates has become a normal phenomenon. Frequent exchange rate volatility deeply affects the profits of SMEs whose order amounts are not big and profit margins are slim. The risk is even more threatening for cross-border e-commerce. Exchange rate hedging is a professional foreign exchange rate risk management tool, which requires time and energy consuming monitoring of market changes, as well as choosing products and signing agreements with banks. Many SMEs are discouraged by such costs and leave FX exposure unmanaged.
The fluctuation of the RMB against the major global currencies and ways to lock the exchange rates and avoid risk have become major concerns for export-oriented businesses.
The solution
Alibaba has long committed itself to provide online business opportunities and foreign trade services for SMEs, while Bank of China boasts professional foreign exchange transaction services and strong system development capability. In order to facilitate SMEs’ export business, the International Trade Department of Alibaba has worked with the bank to launch an online exchange rate locking product – ‘FX Rate Locking’. The product will effectively mitigate FX risk caused by exchange rate volatility and promote SMEs’ development. FX Rate Locking is a forward foreign exchange rate hedging product. Companies may sign forward foreign exchange rate contracts with the bank online and lock the exchange rate of the expected cash flow (fixed amounts and fixed currencies) within a certain period. That is to say, the amount of local currency (RMB) of exported income in major global currencies (USD, EUR) will be locked in advance to avoid the risks of FX loss caused by future exchange rate fluctuation.
Best practice and innovation
Firstly, the user needs to have an accurate forecast of future incomes, lock the exchange rates according to the receiving time, the amount and the currency types. In this way, risks will be mitigated by locked rates. Secondly, the user can now accurately confirm declared value for customs and the costs for foreign exchange according to the invoice value, avoiding the troubles caused by uncertainty and inaccuracy.
Meanwhile, FX Rate Locking can facilitate export order’s accounting of profit and cost and confirm invoice amount. By logging in to the website or the cellphone platform, it is possible to check the quotation and confirm the FX rate and the FX contract will be completed when the foreign currencies are received. It is easy to use and supports the locking of USD and Euro so far.
FX Rate Locking has upgraded traditional bank forward FX transactions by providing an online service. Businesses are spared the issue of documentation flowing back and forth between bank and office, and it enables the user to check the exchange rate changes, grasp market opportunities in time, as well as lock the exchange rates and avoid risks. It is a more convenient, direct and efficient way to overcome complicated procedures.
