The effect of the devaluation of yuan in August can be seen in the annual results of publicly trading Chinese companies — and investors are expecting for more pain.
About 980 Chinese companies listed were reported to have approximately 48.7 billion yuan ($7.5 billion) combination of foreign exchange losses for 2015; that is almost 13 times the amount reported in 2014, according to the data gathered by Bloomberg. Profits at those companies decreased by 11 percent in 2015 to 789.2 billion yuan; meanwhile, the China Petroleum Chemical Corporation, or Sinopec, reported that they’ve lost net 3.9 billion yuan in forex, which increased from only 179 million yuan in 2014.
Yuan’s 4.5 percent devaluation in 2015, which is the largest since 1994, caused an increase in financing costs for Chinese companies — the biggest dollar borrowers in Asia. As it continued to drop in January, it triggered a global stock rout, contributing to a 31 percent drop in Chinese dollar bond sales in the first quarter of 2016. Although the renminbi has rallied against the US dollar for 2 months, it still is depreciating against a basket of currencies.
“Continued yuan depreciation will definitely impact Chinese companies’ bottom line. In some cases, the impact is severe. Although one can argue FX impact is non-cash, it does impact the company’s credit ratios and debt servicing ability,” says Raymond Chia, the head of credit research for Asia (excluding Japan) at Schroder Investment Management Ltd., which is based in Singapore.
The airline sector was affected the most with yuan’s devaluation, having a combined forex loss of 17.9 billion yuan for 2015; as compared to only 951.7 million yuan in 2014, according to the data collected by Bloomberg. Three state-owned airlines (China Southern Airlines Co., Eastern Airlines Corp., and Air China Ltd.) were affected the most, with an equivalent of $2.5 billion FX losses.
Among all airline companies, China Southern Airlines had the biggest forex loss with 5.7 billion yuan in 2015. According to an official at the airline’s investor relations department, the carrier has been planning to cut their dollar debt to 50% of the sum by this year’s end from 61% that is currently refinanced through onshore yuan bonds.
“Chinese companies have been under downward economic pressure, which is exacerbated by FX losses. There are high chances for the yuan to depreciate this year with rising volatility. Companies should be more aware of FX risk,” says the co-head of research at ICBC International Research Ltd., Cheng Shi.