Analysts struggle to understand what weak Chinese yuan means for stocks

Shares are gyrating this week as unprepared investors digest the impact of a weaker yuan on company earnings and future corporate outlook. Regardless of other factors, Chinese firms with high non-yuan denominated debt holdings, and reliance on imported components, are now out. Chinese commodity producers, Chinese exporters, and Hong Kong companies with strong yuan cash flow, are in.

The impact of a weaker yuan though cuts across sectors leaving analysts to dissect company cash flows and sales figures to understand each firm’s cost benefit curve.

A case in point is Jiangxi Copper. With 80 per cent of the firm’s raw materials imported, a dearer greenback means higher operating costs. HSBC analysts estimate a 2 per cent yuan devaluation equals a 4 per cent reduction in pre-tax profit. CLSA however, forecasts a 3.2 per cent boost to the smelting firm’s net profits for every 1 per cent the yuan weakens, citing increased revenues from exports.

Another is computer manufacturer Lenovo. HSBC analysts think the laptop maker will gain as most of its costs are localised in yuan while 70 to 80 per cent of sales are in US dollars. Number crunchers at Jefferies think the added cost from buying imported components with a cheaper yuan will outweigh any benefits.

Confusion reigns after Tuesday’s sudden strategy shift by China’s central bank, the People’s Bank of China, wrong-footed many analysts used to seeing yuan-US dollar exchange rates kept stable by the PBOC at an “appropriate equilibrium level.”

Since then the yuan has fallen 2.82 per cent against the greenback in the onshore market but with the currency up nearly 15 per cent over the proceeding 12 months on a trade weighted basis, many commentators think it could now easily fall 10 per cent before year end.