Devaluation comes home

admin
By admin April 6, 2016 16:42

Devaluation comes home

The yuan’s 4.5% fall in Q3/4 2015 was the largest since 1994, and in the process it increased financing costs for Chinese companies, which are incidentally the biggest dollar borrowers in Asia. Then in January 2016 the yuan depreciated further contributing to a 31% first-quarter fall in Chinese dollar bond sales. At this time although there has been some pegging back of renminbi against the US dollar it continues to weaken against many other currencies such as the euro.

The August 2015 yuan devaluation is now filtering through the books of Chinese airlines and is now showing up in Chinese publicly traded companies’ annual results. Of the 980 major listed Chinese companies reporting the combined foreign-exchange losses amount to 48.7 billion yuan ($7.5 billion) for the 205/16 fiscal year, that is around 12.5 times higher than the 2014/15 fiscal year foreign exchange losses. As a result around 11% was wiped collectively from profits across the board, and the biggest losers in all this – yes, you guessed it – the airlines.  By a huge margin, airlines were hit adversely by least a third more than real estate (Asia’s biggest dollar high-yield borrowers) and by more than double that of the oil and gas sector.

The airline sector suffered a combined forex loss of 17.9 billion yuan for 2015, compared with 951.7 million yuan a year earlier. China Southern Airlines, China Eastern Airlines and Air China combined suffered the equivalent of US$2.5bn in forex losses. Of all Chinese companies, China Southern Airlines had the largest forex loss of 5.7 billion yuan in 2015.

This is all unsustainable – even with the Chinese state tipping cash into the airlines on a regular basis. It is therefore welcome news that China Southern will be cutting the proportion of its dollar debt to 50% of the total by year end 2016 from the current 61%. This process is underway at the moment through refinancing with onshore yuan bonds.

The amount of foreign-currency debt hedged by Chinese companies has risen from 15% to 50% since the August 2015 devaluation. Chinese companies have become increasingly aware of exchange-rate risk and started to consider hedging dollar liabilities at speed, but the process remains reactionary at this time and as such further large forex losses are expected.

admin
By admin April 6, 2016 16:42