Why Chinese stocks are unlikely to be hit hard even if yuan falls further

Chinese stocks will not be significantly affected if China’s currency sees further drastic depreciation, say analysts, with the energy sector expected to be a key driver of growth.

The 12-month US dollar to yuan rate is forecast to fall to 6.78, according to a January report by Credit Suisse analyst Vincent Chan. Still, analysts expect MSCI China earnings to grow 31 per cent this year and energy-sector profits to increase threefold following a rebound in energy prices.

“The key swing factor would be energy prices. Earnings growth of the health care, IT and telecom sectors is also expected to be strong, while the consumer discretionary and materials sectors should see significant earnings declines,” analysts said.

Should the currency depreciate further to a rate of 7.5 – about 23 per cent more than the level seen in August 10 – earningsshould grow about 0.7 per cent less, the report said. Although other sectors will suffer, earnings from the energy sector should increase by more than 10 per cent. with higher crude oil prices expected to translate into higher yuan prices domestically.

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“Generally speaking, extreme RMB movement doesn’t affect earnings too much. Even if the USD CNY rate goes to 7.5, the impact on companies’ earnings would be relatively mild,” analysts said, adding that earnings of health care, consumer staples, utilities and industrials would be “worse off.”

Should the currency depreciate at an “extreme” level, A-share stocks Dongfang Electric Corporation, Fuyao Glass and Shanghai Electric Group would be among the 10 most positively impacted stocks, with an impact of above 15 per cent, the report said.