Portfolio | Guessing game on companies vulnerable to Chinese yuan depreciation

Lower interest rates are a boon for the property sector and a smaller reserve requirement ratio will re-energise lending, but if China’s recent monetary easing further depreciates the yuan, which companies are exposed and which provide safe harbour?

China stocks snapped their torrid run this week in a reversal of sentiment after the central bank signaled Beijing’s commitment to maintaining economic growth, ordering cuts expected to spur activity and inject some 700 billion yuan of liquidity.

But analysts at BNP Paribas note that a lower interest rate will exert depreciation pressure on China’s currency, the unpegging and subsequent devaluation of which reverberated around the globe and put equity markets into their latest free-fall.

With further devaluations in prospect, it’s possible to separate winners from losers by testing companies’ earnings sensitivity at milestone US dollar-Chinese yuan rates, and also looking at the denominations of their assets and liabilities.

Unfortunately for Hong Kong listed companies, a majority would be losers if China’s currency falls further, according to Barclays researchers.

For the companies studied, if the yuan were to trade at 6.50 to the dollar, full-year earnings in 2015 and 2016 would be reduced by 3.1 per cent and 0.8 per cent respectively. If the exchange rate slid as far as 7.0, those earnings would be reduced by 5.5 per cent and 2.5 per cent. Of the 135 companies in the study, only 28 are expected to be unaffected by changes to the yuan exchange rate.