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The winners and losers from China’s move to weaken currency

The winners and losers from China’s move to weaken currency

Mainland airline and property shares hardest hit while export-driven companies rally at the prospect of wares becoming more competitive

Benjamin Robertson

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Mainland airline stocks fell on Tuesday with China Southern down 18.06 per cent and China Eastern down 16.39 per cent. Photo: Xinhua

Mainland airline stocks nosedived on Tuesday as the yuan’s devaluation rippled across the markets, separating the winners and losers as a result of Beijing’s unexpected currency move.

Apart from airline shares, fears for listed companies with large dollar liabilities drove down property counters, while export-driven companies like Li & Fung rallied at the prospect of their wares turning more competitive.

China Southern Airlines fell 18.06 per cent to HK$6.76 and China Eastern Airlines dropped 16.39 per cent to HK$5.46, their worst daily performance since the World Trade Centre attacks of September 11, 2001.

The central bank on Tuesday set the daily guidance point – around which the yuan is allowed to trade up or down 2 per cent against the US dollar – weaker by almost 1.9 per cent.

“Exporters in general and especially in low-margin sectors like garments will benefit from the lower currency. A 2 per cent fall can make a big difference on profit and loss,” said Stuart Allsopp, the head of country risk and financial markets strategy at BMI Research in Singapore.

Trading giant Li & Fung, which supplies Western retail majors like WalMart and Target, rose 4.9 per cent to HK$5.70, its best one-day performance in nearly six months.

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China is the last major economy to join a low-intensity war of currency weakening in the wake of Japan’s decision to allow the yen to soften to make its exports competitive as part of efforts to end two decades of stagnation.

Worsening export data and a slowing economy meant the shift to a weaker currency was “long overdue” after a near 15 per cent appreciation in real terms over the past year, wrote Richard Iley of BNP Paribas.

The 2 per cent depreciation equated to a 1.5 per cent increase in year-end exports, while a 10 per cent depreciation would boost 2015 exports by 6 per cent, in line with official targets, Iley wrote.

The yuan’s fall upended assumptions US dollar cross-rates would remain stable and sent analysts scrambling to recalculate the cost to companies.

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China’s move to devalue the yuan came after data showed exports fell 8.3 per cent last month. Photo: AFP

Watch: Currency war fears over yuan devaluation

All in, mainland firms may face an extra US$10 billion in additional servicing costs on US$529 billion worth of outstanding offshore bonds and loans, Bloomberg reported.

Airlines might be hardest hit. At the end of last year, 97.2 per cent of China Eastern’s debt was in US dollars, compared with 93.3 per cent of China Southern’s, where a 1 per cent drop in the yuan will cut 767 million yuan from annual profits, according to Bloomberg.

Mainland property firms also face higher debt maintenance costs, wrote analysts at brokers UOB Kay Bian Edison. A 2 per cent yuan depreciation will lower 2015 net profits at Shui On Land by 15.1 per cent and at Glorious Property by 10.3 per cent, according to UOB analysis.

Shares in Shui On Land fell 1.46 per cent to HK$2.02 while Glorious Property rose 1.03 per cent to 98 HK cents.

Mainland materials and consumer stocks on Tuesday outperformed the market on hopes a weaker yuan would boost exports after several months of underwhelming data.

Shares in computer maker Lenovo finished 3.58 per cent higher at HK$8.69 despite a cautionary note from investment bank Jefferies that higher component sourcing costs would outweigh the export benefits of a cheaper currency.

Though a welcome boost to exporters, by signalling a move towards a weaker currency Beijing might yet “create a layer of uncertainty” that deters capital investment, cautioned Allsopp.

The Hang Seng index closed 0.09 per cent lower at 24,498.21 points on Tuesday and the H-share index tracking mainland stocks slipped 0.24 per cent to 11,264.64, with both indices surrendering earlier gains. Total market turnover was HK$96.7 billion.

Mainland indices also traded down, with the Shanghai Composite index finishing 0.01 per cent weaker at 3,927.91 points while the CSI 300 ended 0.43 per cent lower at 4,066.67. The Shenzhen Composite index closed up 0.41 per cent at 2,284.27. Total market turnover was 1.27 trillion yuan.

This article appeared in the South China Morning Post print edition as Devalued yuan sees winners and losers

PUBLISHED : Wednesday, 12 August, 2015, 12:51am
UPDATED : Wednesday, 12 August, 2015, 8:32am

#LiAndFung   #ShuiOnLand   #RenminbiYuanDevaluation

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