Winners and losers as yuan weakens against the dollar and US-China trade war fears become reality

Chinese textile firms, hats and gloves manufactures think it is great news to have a falling yuan, but retailers and restaurant operators are facing an uphill struggle

PUBLISHED : Saturday, 07 July, 2018, 8:01am
UPDATED : Monday, 09 July, 2018, 11:24am

Acting as fast as possible may not always be the smartest move.

That’s a lesson one Hong Kong-based chief executive says he has learned to his cost, amid the Chinese yuan’s recent tumble in value.

When Ian Chan, chief executive of technology component maker Kayamatics, noticed the yuan was falling sharply against the US dollar in mid June, he immediately rushed to the bank to buy some.

His company sells Internet of Things devices, such as trackers for trucks to the US market, while its main production lines are sold in the mainland.

“We get paid in US dollars by our US clients, and we need to exchange them for yuan to pay for our staff and suppliers, who are based in the mainland,” Chan said.

“As we are small company; we do not have any big banks helping us with hedging. I can only buy as much yuan whenever I hear it is falling against the US dollar,” he said.

Offshore yuan fell a combined 5.4 per cent against the US dollar, during what was its longest everlosing streak of falls – 14 days in a row to July 3.

Chan initially thought he was being smart moving to convert quickly.

But the currency continued falling, soon after it first started dropping from June 14, when the People’s Bank of China (PBOC) opted not to follow the US lead, and increase its interest rates.

The drop in the yuan’s value was also due to ongoing worries over a trade war between the US and China intensifying – which eventually turned into reality on Friday.

If only he had waited another fortnight to buy, the yuan would have been even cheaper. As the old adage goes: hindsight’s a wonderful thing.

It dropped to 6.7326 yuan against the dollar on July 3, that’s eight per cent less than its peak value of 6.2352 on March 27.

The losing streak only came to a halt after the PBOC was forced to comment on how it was prepared to “defend” the currency, around lunchtime on July 3, vowing to intervene if needed. The yuan has now bounced back to around the 6.65 level.

“It would be good if the PBOC stabilises the yuan at about 6.60 level, which is already lower by almost 5 per cent from its peak this year. This would cut our costs and boost the competitiveness of our exports to the US,” Chan said.

While a falling yuan helps his business cut costs, he says he still worried, however, that his company could be hit hard by an ongoing trade war began on Friday, in which the US imposed US$34 billion in tariffs on imported Chinese machinery, car parts and medical device on while China also hit back immediately with equivalent tariffs on US products, including soybeans and sport utility vehicles.  

“We expanded into the Malaysian market this year and plan to expand more into other southeast Asian countries such as Vietnam, and the Philippines. We will also explore Europe.

It would be good if the PBOC stabilises the yuan at about 6.60 level, which is already lower by almost 5 per cent from its peak this year. This would cut our costs and boost the competitiveness of our exports to the US
Ian Chan, chief executive of technology component maker Kayamatics

“Diversification is what’s needed as we do not know how the trade war will develop and whether we (or our products) may face any ban by the US,” Chan said.

“We are not the only ones. Many manufacturers have been looking at moving some of their production to countries outside the mainland to prepare for a trade war.”

Lawsgroup, a Hong Kong textiles giant, is one of the largest of its type in the world, with more than 20,000 workers producing clothing items for many global brands including GAP, JC Penney and Uniqlo.

It has always adopted a policy of diversification, with various production facilities now, including in the mainland, Vietnam, Myanmar, Banglashesh and the Philippines,” said Bosco Law Ching-kit, deputy chairman and chief executive of Lawsgroup and Laws Fashion Group.

“The initial stages of the trade war have not yet affected the fashion or textiles industry. However, we need to prepare for the worst.

“That’s why we have always diversified our business. Besides moving production to different countries, we have also developed new sales channels and new markets in recent years.

“We do not want to rely only on the US market, and have already expanded our sales into Southeast Asia as well as mainland China,” said Law.

“This will help reduce the impact, if there are any adverse restrictions from the US,” he said.

“We don’t expect the trade war to end soon, and may last for a year.

“Faced with such a situation, it would be better for the PBOC to keep the yuan weaker to help domestic manufacturers like us to keep our export prices lower,” Law said. 

Another Hong Kong firm making contingency plans is Tsim’s Company, a 50-year old gloves and hat maker which sells its end products mainly to overseas manufacturers operating out of the mainland.

“We export to the US and Europe while manufacturing in the mainland. A cheaper yuan helps cut our export prices, when buyers pay us in US dollars. The yuan’s depreciation is good for us,” said Kelly Tsim, director of the company.

But a falling yuan could also hit Tsim’s other businesses, particularly it mainland property and hotels operations, which generate much of their income in yuan.

“As the yuan is falling against the US dollar, we have delayed remitting in the currency to Hong Kong,” she said.

Hong Kong retailers and restaurants have also been hard hit by the weaker Chinese currency and falling capital market.

The Shanghai Composite Index lost 14 per cent of its value in the first half, to be the worst performer among the world’s major markets, while Hong Kong’s benchmark Hang Seng Index fell 3.2 per cent during the same period.

“The poor capital market has hit retailers hard, especially the jewellery sector, as buyers are likely to avoid buying luxury items at such a time,” said Haywood Cheung Tak-hay, president of the Chinese Gold & Silver Exchange Society.

And restaurant operators have been feeling the pinch too, added Sal To Wing-nin, director of Yixin Catering Group.

We saw far fewer bookings in June, which is likely to be directly linked to the poor performance of the capital market. When people cannot earn good money from the stock market, it’s natural they are in no mood for banquets or parties in restaurants
Sal To Wing-nin, director of Yixin Catering Group

“We saw far fewer bookings in June, which is likely to be directly linked to the poor performance of the capital market. When people cannot earn good money from the stock market, it’s natural they are in no mood for banquets or parties in restaurants,” To said.

This is pretty much what happened during the 1997 Asian financial crisis. Restaurants’ performance was correlated with the performance of the Hang Seng Index and other investment markets.

“The good news is a falling yuan helps cut our cost as a lot of our cooking ingredients come from the mainland. A falling yuan against the US and Hong Kong dollar help us keep our running cost lower,” To said. 

Cosco Shipping Ports, one of China’s two largest port operators, is also among those companies which share both the joy and fear of a falling yuan and a US-China trade war.

The company is a Hong Kong red chip which runs ports in major mainland cities including Shanghai, Qingdao, and Yantian, as well as at overseas sites including Greece, Belgium and Turkey.

“A falling yuan will help mainland firms export more goods overseas, which would benefit our global port operation,” said Kelvin Wong Tin-yau, Cosco Shipping Port’s executive director and deputy managing director.

“Any trade war, however, would affect trade flow, which may also hit our port business.”

Hong Kong’s financial sector, meanwhile, will feel a different kind of impact from a falling yuan. 

Insurance companies in the city can expect to benefit from a falling yuan, as there is a strong market from mainlanders buying life policies, denominated in Hong Kong or US dollars, to hedge against their currency risk. 

In 2016, mainland Chinese spent a record HK$72.68 billion (HK$9.26 billion) buying Hong Kong-issued life policies, double the 2015 total.

Chan Kin-por, the lawmaker representing the sector, said the yuan’s 7 per cent fall has forced more to buy their insurance products in Hong Kong.

The yuan bounced back in 2017, and also in the first quarter of this year, which then discouraged many buyers.

But the yuan’s recent strong depreciation in recent weeks may have encouraged more to return to the Hong Kong market.

Yuan deposits and yuan-denominated dim sum bonds – a bond denominated in Chinese the Chinese currently but issued in Hong Kong – may well see significant falls as a dropping yuan is likely to discourage investors from choosing such asses.

Their spending dropped to HK$11.8 billion in the first three months of this year, down 37 per cent from the same quarter a year earlier.

Total yuan deposits in Hong Kong stood at around 600 billion yuan as of the end of May, a significant fall from 994.1 billion yuan in July 2015, just before the PBOC devaluating the yuan by 2 per cent on August 11, 2015.  

“The biggest losers of a falling yuan could also include mainland airline companies and property developers”, added Ben Kwong Man-bun, a director of KGI Asia.

“They carry a high amount of US dollar debt, and are being hard hit as they now need more yuan to repay that.” 

Jon Cowley, a tax and trade partner based in legal firm Baker McKenzie’ Hong Kong office, said Chinese industrial product companies and American automotive and agricultural companies could be the most immediate casualties, short term.

“If trade tensions continue to escalate, consumer product companies can be adversely affected, as well,” he said.

“Immediate winners may include producers of substitute products in jurisdictions that are not subject to the tariffs, as their products will be relatively less expensive and more attractive as long as the tariffs remain in place.”