Brace for Yuan Horror Show

The bill for a weakening currency is coming due. It won't be pretty.

It's about to become clear just how much pain the recent devaluation of the yuan caused to Chinese companies. As earnings season accelerates in Hong Kong, Shanghai and Shenzhen, investors can brace themselves for larger losses from foreign exchange and rising interest expenses. That's just the beginning.

With the yuan having reversed course from steady appreciation to rapid devaluation, companies such as developer Shimao are griping about rising interest costs and trying to replace foreign debt. Any such move will come too late to save investors from sharing the pain. There are more than 200 publicly traded Chinese companies which have issued bonds in either U.S. or Hong Kong dollars and publish financial reports in yuan. All added, they have more than $364 billion in syndicated loans and bonds in the two currencies.

Reversing Course

The Chinese currency has been dropping quickly after several years of steady appreciation

Source: Bloomberg

Most of that isn't hedged, which until recently was the smart thing to do. For those with enough size to lure global banks and investors, it was a no-brainer to borrow in dollars (or in Hong Kong dollars, which amounts to the same given the currency's peg to the greenback). Rates were far lower -- at times less than a third of those at home -- and with the yuan appreciating the cost of paying interest progressively dropped.

As a result, companies that borrowed overseas were able to book foreign-currency gains on their debt for several years. No longer: 

On the Wrong Side

Chinese companies with debt in U.S. and Hong Kong dollars have started to see losses from the exposure

Source: Bloomberg; company filings

* 2015 refers to the latest filing, which may not be the full-year results

Apart from causing paper losses, the drop in the yuan is having a real cash impact on these companies. Their cost of meeting interest payments is rising in tandem with the U.S. dollar's climb. Developer Sunac China Holdings, for instance, saw its interest expenses jump more than 10 times in the past five years to 1.4 billion yuan in the period ended June 30. The company sold its first dollar bond in 2013 and now has some $9 billion of debt in the currency.

Like Sunac, many issuers get paid mostly in yuan, which will increase the pain if the currency continues its downward trend.

Growing Interest

The average amount Chinese companies with foreign debt paid in coupons has risen fast

Source: Bloomberg; company filings

* 2015 refers to the latest filing, which may not be the full-year results

That's exactly what currency strategists are predicting. The median forecast of analysts surveyed by Bloomberg calls for the yuan to be at 6.7 per dollar by year-end, or 2.7 percent weaker. Analysts at Rabobank and Citigroup see it even worse, predicting December levels of 7.5 and 7.2 yuan, respectively.  Year-end profit reports will show the losses resulting from last year's 4.4 percent drop in the currency and provide a sense of what further declines may cause.

This earnings season, investors would do well to skip past the net profit figure and go straight to the comprehensive income, where foreign-currency gains and losses are stated. Be prepared, though: It's likely to be an unsavory sight.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Christopher Langner in Singapore at

    To contact the editor responsible for this story:
    Matthew Brooker at

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