Chinese exporters gain from weak yuan while dollar debtors, importers take a hit
Analysts see the currency falling further under Trump presidency, with mechanical and electronic goods makers the biggest beneficiaries
The boost Chinese exporters and contractors with overseas projects are getting from the devalued yuan is set to continue for at least another year, according to analysts.
Further depreciation in the currency is expected throughout 2017, making those companies more competitive and helping them achieve bumper profits.
However, the bearish forecasts for the yuan will not be welcomed by firms that hold hefty debt denominated in US dollars or those that rely heavily on imported raw materials. The former have already seen their profits eroded by foreign-exchange losses, while the latter have to pay more for their imports in local currency terms.
The effect is tipped to continue, as analysts predict further yuan weakness amid probable interest rate rises in the US under the new administration. President-elect Donald Trump has vowed to raise spending to rejuvenate the nation’s crumbling infrastructure, which analysts said could stoke inflation.
“The uncertainty for Asian currencies has risen after the US presidential election,” HSBC currency strategists said in a note on Wednesday. “The US [Federal Reserve] could raise rates faster than the market is expecting, if fiscal stimulus is implemented.”
The bank’s latest forecast is that the yuan will decline from 6.87 against the US dollar to 7.10 by the middle of next year, dipping slightly further to 7.20 by year-end.
It represents a major shift from HSBC’s previous view on the devaluation pace of the Chinese currency, when it predicted the dollar would fetch 6.85 yuan by mid-2017 and 6.90 by the end of the year.
The yuan this week slumped to its lowest level since late 2008, bringing the loss in value so far this year to nearly 6 per cent.
Li Daokui, a professor of economics at Tsinghua University and former monetary policy adviser to the Chinese government, said on Thursday he believes the central bank is likely to cap any further decline in the yuan to no more than 5 per cent in the next year.
Analysts said exporters are the biggest direct beneficiaries of the currency’s weakness, especially those that sell their products to the US. The benefit is less apparent on exports to nations whose currencies have also fallen against the greenback.
Guotai Junan Securities analysts said in a recent report that producers of mechanical and electronic goods - which accounted for 49 per cent of Chinese exports to the US last year – were the biggest beneficiaries of the weak yuan. They are followed by furniture and toy manufacturers and textile products, which account for 12 and 9 per cent of exports respectively.
Neil Wang, greater China president for research firm Frost and Sullivan, told the South China Morning Post that the lower yuan will enhance the cost competitiveness of electronic goods majors like Huawei Technologies, ZTE Corp and Lenovo Group, and help them grab greater market shares.
Overseas sales accounted for 58 per cent of Huawei’s total revenue last year, compared to 47 per cent for ZTE and 68 per cent for Lenovo, he noted.
Qiu Zengchao, founder of Shenzhen-based iHotku Technology, a maker of “smart” electronic baby nursing bottles that cost US$100 each, expects to see greater sales on the back of the depressed yuan.
“The price can decrease four or five dollars next year because of the yuan’s devaluation,” he told the Post. “I estimate our nursing bottle could see 20 per cent in sales growth next year to US$5 million.”
Still, Guotai’s analysts said there is a risk that the currency-induced cost advantage could be offset by trade barriers, which potentially include the 45 per cent import tariff on Chinese goods threatened by Donald Trump during his election campaign.
However, that figure is likely to be significantly watered down if passed by Congress.
Wang said the US government is unlikely to risk straining its wider trading partnership with China by imposing high tariffs on Chinese goods, given the US has a surplus in service trade with the country.
For exporters that have been moving their production offshore due to surging labour and environmental compliance costs in China, a lower yuan will only provide temporary relief and won’t alleviate their need to relocate production.
Shenzhen-listed Lu Thai Textile, a shirt maker that supplies 18 per cent of the world’s high-grade yarn dyed fabric, was cited by a Capital Securities note as one such firm. It exports 75 per cent of its output in US dollar terms, and has moved production to Vietnam, Cambodia and Myanmar which have also seen their currencies depreciate against the greenback.
Another group of companies that will benefit from a lower yuan is overseas engineering contractors that build infrastructure and production facilities. Their projects are typically priced in US dollars, while many of the costs are incurred in yuan and in currencies of emerging markets that have also been falling against the dollar.
According to a Zhongtai Securities report, mainland-listed infrastructure builders Power Construction Corporation of China, China Communications Construction and China Gezhouba Group, as well as chemical plants construction firm China National Chemical Engineering are among the top winners in this regard.
This is because some 31 to 37 per cent of their new order addition in the first half of the year was from overseas markets, although offshore revenues are trailing at 17 to 25 per cent of the total.
Shandong province-based Zhongtai Securities analyst Yang Tao said it is difficult to quantify the cost savings from the yuan’s more than 10 per cent devaluation since mid last year, as each project’s local material and labour procurement policy, as well as cost and payment structure, are different.
Still, he expects the yuan’s decline could add between 0.5 and 1.0 percentage point to the firms’ net profit margin this year.
The net margin for China Communications was 3.9 per cent in the first nine months of 2016, compared to 3.3 per cent for Power Construction.
Investors have bid up the shares of these four companies by an average 12.4 per cent since the start of last month as the yuan’s devaluation accelerated, compared to a 6.8 per cent rise in the Shanghai Composite Index overall.
Shares of their Beijing-based rival China CAMC Engineering, a general contractor for a wide array of sectors, soared 33.8 per cent. Essence Securities analyst Xia Tian said the firm sources almost all of its revenues from overseas projects, the highest proportion among its peers.
Meanwhile, the weaker yuan means companies such as the mainland airlines, that have heavy US or Hong Kong-dollar denominated debt but report their financial results in yuan, will book foreign exchange losses and see lower profits as a result.
According to China Galaxy International analyst Wang Chi-man’s calculations, Air China, China Eastern Airlines and China Southern Airlines’ foreign exchange losses amounted to 30 per cent of their pre-tax profit on average.
Steel producers that rely on imported iron ore and coking coal will also see their profit margins eroded by the yuan’s weakness, on top of sharp price gains in steel smelting ingredients in recent months.
China Investment Securities’ analyst He Xin said although listed Chinese steel mills have reported a total net profit of 8.8 billion in the first three quarters, a big turnaround from steep losses last year, profit margins have been falling fast.
An index measuring the differential between steel selling prices and their production costs has slumped from over 900 in April to 253 on November 11, he noted, adding that the steel mills’ third-quarter profits have fallen markedly from those in the second quarter.
Additional reporting by Zen Soo and He Huifeng