Chinese Companies Hit by Yuan Devaluation

If you were thinking of investing in Chinese stocks, think again. China troubles are not over as Chinese companies are hit by the Yuan devaluation. Bloomberg Business reports that China Forex losses jump 13-fold and there is more to come.

The impact of August’s yuan devaluation has shown up in Chinese publicly traded companies’ annual results – and investors are bracing for more pain.

Some 980 listed Chinese companies reported combined foreign-exchange losses of 48.7 billion yuan ($7.5 billion) for last year, almost 13 times the amount in 2014, Bloomberg-compiled data show. Profits at those firms slumped 11 percent last year to 789.2 billion yuan. State-owned oil refiner China Petroleum & Chemical Corp., or Sinopec, reported 3.9 billion yuan in net FX losses, increasing from 179 million yuan in 2014.

Back when the dollar always seemed to be falling versus the Yuan and China repeatedly needed to buy dollars to keep its currency in check, Chinese companies took out loans denominated in dollars. After all  if the dollar was going to be weaker next year why not pay back your debt in the weaker currency. Unfortunately for many Chinese companies the dollar has been on a tear and the financing costs have gone up in the land of managed capitalism. The worst hit among Chinese companies was China Southern Airlines. This company is traded as an ADR in the USA. Last June shares sold for more than $60 a share and today the ADR trades for $33 a share. Real estate companies are the next worst. Agile Property Holdings sold for $7 a share in Hong Kong as recently as last May and sells for $4 a share today. Where is this going next?

Chinese Economic Slowdown

China was the economic miracle of the world for decades as it rose from an isolated Communist country to be the workshop of the world. But, the factors that drove that expansion such as low wages and a seemingly unlimited pool of cheap young labor are wearing thin. And China has based its expansion on borrowing to build its industrial base and then paying off the debt with ever increasing profits. Now as the expansion slows this becomes a less viable strategy. The Financial Times reports that in March the Chinese economy was riding choppy waves.

China appears to have had a good March, with a closely-watched monthly survey indicating that both the services and manufacturing sectors were doing better than a few weeks before even if overall growth remains tepid.

The Caixin composite manufacturing purchasing managers index came in at 51.3 in March, the highest reading in 11 months. It had been in 49.4 February.
The services PMI was 52.2, up from 51.2.

Last week the Caixin manufacturing purchasing managers index came in at 49.7 in March, ahead of the 48.3 economists were expecting. It had been 48 in February.

The Caixin-sponsored series is based on a much smaller sample of private companies and tends to be more volatile than the official reading. The official survey focuses on larger state enterprises.

A manufacturing purchasing managers index of less than 50 predicts a contraction in that sector. This is the crux of the Chinese problem. They need to convert to more consumer spending and a more service driven economy. In the meantime a heavy debt burden is exacerbated by the falling value of China’s currency. If you are thinking that it may be safe to invest in China again, you might want to reconsider. We wrote about a weak Chinese manufacturing report 4 years ago and it may well be another 4 years before things stabilize in the land of managed capitalism.

Chinese Companies Hit by Yuan Devaluation PPT

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