Yuan's drop a mixed blessing for Chinese exporters

Competitive advantages of weaker exchange rate offset by increased level of business uncertainty

PUBLISHED : Wednesday, 05 March, 2014, 11:10am
UPDATED : Thursday, 06 March, 2014, 1:02am

While the recent drop in the value of the yuan might seem good news for mainland exporters, few welcomed it.

More volatility is expected to come, as Beijing gives the currency more latitude to fluctuate.

"The higher the volatility of the yuan against the US dollar, the more difficult to manage our currency risks," said Yeung Chi-kong, a vice-chairman of Hong Kong toymaker Blue Box. "If we know it's going to appreciate or depreciate, we can protect ourselves by setting certain buffers on orders. But now, it brings about more uncertainty."

The fluctuating currency is the latest in a series of woes besetting industries in the Pearl River Delta, which include soaring wages, labour shortages and fickle overseas demand.

A volatile currency not only brought uncertainty to the business of many cross-border companies but also increased their funding costs, UBS economist Wang Tao said.

It does more harm than good if the yuan goes up and down sharply

Federation of Hong Kong Industries chairman Stanley Lau Chin-ho does not welcome the volatility even though a lower yuan helps boost exports. "It does more harm than good if the yuan goes up and down sharply within a short time," he said.

On Tuesday, People's Bank of China governor Zhou Xiaochuan described the recent volatility in the yuan as "normal".

The government would allow the yuan to float within a widened two-way range this year, Premier Li Keqiang said in his work report to the annual National People's Congress meeting in Beijing yesterday.

Mizuho economist Shen Jianguang said he expected the central bank to accelerate the liberalising of the capital account and to expand the trading band of the yuan.

Shen viewed the sudden yuan depreciation as "a stress test" by the PBOC before it pushes ahead with further reforms on interest rates.

Last week, the yuan fell about 0.9 per cent in its biggest-ever weekly decline, capping off its largest monthly loss of 1.4 per cent in February.

Market rumours spread that speculators had built large long positions in the yuan earlier this year after the central bank surprised the market by allowing the currency to gain 2.9 per cent last year.

That far exceeded initial market expectations for an appreciation of 1 per cent.

Some economists attributed the unexpected fall in the yuan to the PBOC's intervention to combat the inflow of speculative funds, sending a signal that the yuan's one-way bull run is over.

Wang said companies such as utilities and property developers, which rely heavily on overseas funding, were vulnerable to higher finance costs.

A case in point is Hong Kong-listed China Gas, the mainland's largest city piped-gas supplier, which has half of its HK$15 billion in debt denominated in US dollars and the remainder in yuan.

China Gas chief financial officer Eric Leung Wing-cheong told the South China Morning Post the firm was closely monitoring any yuan policy changes.

Leung said the firm started about a year ago to borrow US dollars offshore to settle debts in yuan on the mainland to benefit from the interest spread between the two currencies.

This means the firm borrows dollars at about 3 per cent interest per annum to pay off yuan loans at 5 to 6 per cent per annum, saving finance costs.

The strategy also produces a currency gain if the yuan keeps appreciating against the dollar. However, a yuan depreciation will offset these advantages.

"If the yuan depreciates significantly, we will have to unwind our dollar borrowings," Leung said.