More losers than winners in China's yuan devaluation

While it is unclear if the yuan will keep dropping, investors are starting to assess the potential winners and losers.
While it is unclear if the yuan will keep dropping, investors are starting to assess the potential winners and losers. PHOTO: BLOOMBERG

Chinese airlines and European luxury carmakers are emerging as the early losers after the People's Bank of China let the yuan fall the most in two decades.

China's surprising move to cut its daily reference rate by 1.9 per cent on Tuesday (Aug 11) rippled through global markets. Policymakers called the change a one-time adjustment and said its fixing will become more aligned with supply and demand.

While it is unclear if the yuan will keep dropping, investors are starting to assess the potential winners and losers.


1. Chinese airlines

Chinese carriers have most of their debt in US dollars. A weaker yuan will increase their costs to pay it off and hurt their earnings.

China Southern Airlines Ltd. declined 18 per cent in Hong Kong trading, the most since 2001. China Eastern Airlines Ltd. slumped 16 per cent, the steepest drop in seven years. Each 1 per cent drop in the yuan erodes 767 million yuan (S$170 million) from China Southern's annual profit, according to the carrier's 2014 financial report.

2. European luxury-goods sellers

As the European Union's major trading partner, China and its growing middle class has been a boon for the region's luxury-goods makers. A weaker yuan makes it more expensive for Chinese consumers to buy German cars, Swiss watches and French handbags.

Shares of BMW AG, which received about 19 per cent of its revenue from China in 2014, sank 4 per cent in Germany. China also accounted for about 10 per cent of Daimler AG's sales.

LVMH Moet Hennessy Louis Vuitton SE slid 5.4 per cent. Sales from Asian nations excluding Japan accounted for about 29 per cent of the luxury-goods maker's sales last year.

3. Consumer-product makers with China as the biggest overseas market

Apple Inc. slid 5.2 per cent in the biggest decline since January 2014. China was Apple's second-largest market for the iPhone in the first half of this year. The yuan's devaluation may prompt the company to raise prices or contend with contracting margins and unit growth, according to Bloomberg Intelligence.

Swatch Group slumped 3.6 per cent. The Swiss watch maker derived 37 per cent of its 2014 revenue from the greater China region.

4. Commodity producers

The yuan's decline increases the cost of imports, including commodities. Vale SA, the world's biggest iron-ore producer, dropped 5.1 per cent in Sao Paulo. China accounted for 37 per cent of the Vale's revenue in the second quarter.

China's imports contributed to 35 per cent of the Australian mining company BHP Billiton's sales last year and accounted for 38 per cent of the sales of Rio Tinto Plc.

5. Asian Currencies

All major Asian currencies fell on concern a weaker yuan will force other policymakers in the region to devalue their foreign-exchange rates as cheaper Chinese exports edge out competitors.

The Singapore dollar led the decline, falling 1.4 per cent in the biggest sell-off since 2011, while the South Korean won dropped the most since May 2013.


1. Chinese exporters

Local exporters in general benefit from a cheaper yuan. China Machinery Engineering Corp. rose as much as 5.9 per cent in Hong Kong, while Lenovo Group Ltd. closed 2.9 per cent higher. Each gets more than 65 per cent of revenue from overseas. China car exports have slowed in the past years as the weakening of the yen and won increased the pricing advantage of Japanese and South Korean competitors.

Textile and clothing makers that sell to overseas markets are among companies that will benefit from the yuan's depreciation, according to Delong Yang, an investment manager at China Southern Fund Management. Huafang Ltd., a Chinese textile manufacturer, surged 10 per cent in Shanghai.

Li & Fung Ltd., a Hong Kong-based trading company which sells China-made goods from clothes and toys to U.S. and Europe, rose 5 per cent in Hong Kong.

Source: Bloomberg