China's developers shrug off earnings risks from yuan depreciation

Mainland developers, sitting on record piles of offshore debt, are unshaken by the recent depreciation of the yuan, despite warnings from some analysts about the impact on earnings and share prices.

The sharp 1.46 per cent fall in the yuan against the US dollar last month made it the worst-performing currency in emerging Asian markets.

China's top foreign exchange regulator Yi Gang said last week that the yuan could become more volatile, adding to expectations that Beijing would soon widen the daily trading band from 1 per cent on both sides of a midpoint set by the central bank.

"With the yuan becoming more volatile, the currency issue is standing out," Yu Liang, president of China Vanke, the country's biggest developer by revenue, said last week.

"But to hedge against it has a cost, too. We will keep a close eye on currency risk and take a series of measures to deal with it when necessary."

Albert Yau, chief financial officer of CIFI, told the South China Morning Post last week that the recent depreciation of the yuan did not represent a change in the direction of the currency and was therefore not an immediate concern.

Not everyone agrees. Credit Suisse analyst Du Jinsong said: "Most Chinese developers are heavily exposed to US dollar debt - up to 90 per cent of their total debt, with no hedging."

For example, 87.2 per cent of China Overseas Land & Investment's debts were either denominated in US or Hong Kong dollars at the end of June 2013.

A 5 per cent to 15 per cent depreciation might reduce developers' earnings by 1 per cent to 74 per cent and increase net gearings by 0.3 to 21 percentage points, Du wrote in a report last week.

More balanced two-way trading might become one of the factors that hindered a re-rating for the real estate sector, as the mainland's property stocks had long been considered a way to play the yuan appreciation, he said.

Outstanding US dollar-denominated debt for the Chinese real estate sector totalled US$45.9 billion by March 6, Dealogic data showed. So far this year, Chinese developers had issued US dollar-denominated debts of US$7.1 billion after a record US$19.6 billion last year, it said.

Kalai Pillay, head of Asia-Pacific industrial ratings at Fitch Ratings, said the recent depreciation of the yuan was not sizeable enough to become a concern among developers.

"They are just letting go a bit of what they had gained in the past few years," he said, adding that compared with onshore borrowing, offshore debts were still much cheaper, even including currency cost.

"[Yuan depreciation] becomes an issue only when they have to pay back their debt. In most cases, they issue new debt as their business is still growing very fast," Pillay said.

"Currency is a side show. Other factors are looming much bigger, [such as fierce domestic competition and higher construction and land cost.]"

Clifford Lee, head of fixed income at DBS Bank, said: "The yuan will continue to be weakish and it will stand where it is now by year's end."