The onshore RMB closed at 6.5943 against the U.S. dollar at 18:10 Tuesday (Aug. 29), hitting a new high since last June. The RMB has strengthened nearly 5 percent against the U.S. dollar since the beginning of the year.
Why RMB has been strengthening? For international factors, the U.S. dollar has been relatively weak. The U.S. dollar index jumped from 103 at the beginning of the year to the current 93 with a decrease of nearly 10 percent. The weak U.S. dollar promoted the strengthening of RMB, indicated Xie Yaxuan, an analyst with China Merchants Securities. As the external pressure reduces, the RMB market saw improved supply and demand, which supported the surging of the RMB exchange rate.
The airline, shipping and supply chains will be affected by the RMB appreciation. Rough statistics show that nearly 20 listed companies proposed to conduct foreign exchange hedging to avoid risks on the foreign exchange in August.
Hedge risks with foreign exchange instruments
More and more listed companies started to hedge risks with foreign exchange instruments.
Shenzhen Tempus Global Business Service Holding Ltd. (300178.SZ) announced on Aug. 29 that the company proposed to conduct foreign exchange hedging businesses, including future foreign exchange settlement, foreign exchange swap, foreign exchange options and other foreign exchange derivatives. The company indicated that it conducts the business to meet the demand for payment with foreign currencies, prevent and control foreign exchange risks and reduce the effects of the foreign exchange fluctuation on the operation results of the company. The total amount of the foreign exchange hedging will be no more than 500 million yuan. The business is based on its regular business and is not for profits.
Whirlpool (China) Co., Ltd. (600983.SH) announced on Aug. 26 that “Guangdong Whirlpool Home Appliances Co., Ltd. (“Guangdong Whirlpool”), a wholly-owned subsidiary of the company, proposes to conduct future foreign exchange settlement for business development”. Currently, the exports of its products to overseas markets are settled with foreign currencies. The exchange profit or loss will have significant effects on the operation results of the company when the foreign exchange sees significant fluctuations. As a result, Guangdong Whirlpool proposes to conduct future foreign exchange settlement to mitigate the effects of the foreign exchange fluctuations on the profit of the company.
It is learnt that the future foreign exchange settlement can reduce the effects of the foreign exchange fluctuations on enterprises when it sees significant fluctuations. The enterprise can focus on production and operation. However, the future foreign exchange settlement also faces certain risks on the fluctuation of the foreign exchange and the breaching of contracts by clients.
It is noteworthy that besides Whirlpool, 20 companies, including Suzhou Good-ark Electronics Co., Ltd. (002079.SZ) and Shenzhen Kstar Science & Technology Co., Ltd. (002518.SZ), will also conduct future foreign exchange settlement.
Analysts believe that the performance of companies with large proportions of exports and overseas assets will be adversely affected as the RMB is strengthening. It is expected that certain companies will recorded more foreign exchange profits or losses in their interim reports for 2017, which will promote companies to conduct foreign exchange settlement to hedge risks.
Airline companies to benefit most
The strengthening RMB exchange rate is boosted by the improved economic fundamentals. “The economic recovery in China effectively boosted the RMB exchange rate.” Zhao Qingming, chief economist at the research institute of the China Financial Futures Exchange, indicated that foreign exchange authorities have improved policies on individual foreign exchange purchase and the going out of enterprises. The pressures on cross-border capital flows have been reduced and the market confidence has been recovered. All these promoted the strengthening of RMB.
Securities companies believe that airline, shipping and supply chain sectors will benefit from RMB appreciation.
Minsheng Securities believes that airline companies will benefit most from RMB appreciation. The supply, oil price and foreign exchange are major factors affecting the performance of airline companies. As airline companies own huge debts denominated in the U.S. dollar, RMB appreciation will result in exchange profits. China Southern Airlines Company Limited (600029.SH), China Eastern Airlines Corporation Limited (600115.SH) and Air China Limited (601111.SH) suffered over 3 billion yuan of exchange losses in 2016. Exchange profits are expected to hike significantly in the second half, which will have positive contributions to the performance. Airline transportation in China achieved rapid growth in the first half. Domestic airlines received 237 million passengers, increasing 14.2 percent year on year. Driven by the peak season in summer, the low oil price and the RMB appreciation, the shipping industry is expected to see better operating results.
Huachuang securities believes that the airline sector will benefit most from RMB appreciation, followed by shipping companies and those with foreign currency businesses. Supply chain enterprises will see relatively small fluctuations.
Airline companies and their subsidiaries with procurement and transportation services in the U.S. dollar generally have debts denominated in the U.S. dollar, which will result in exchange profits or losses. COSCO shipping Specialized Carriers Co., Ltd. (600428.SH) recorded exchange losses of 33 million yuan in 2016, accounting for 66 percent of the net profit. COSCO Shipping Holdings Co., Ltd. (601919.SH) recorded exchange losses of 218 million yuan in 2016 and it recorded losses in the same year.
Analysts believe that supply chain enterprises are involved in foreign currency settlement in their operation. Overseas procurement is settled in the U.S. dollar while domestic businesses are settled in RMB. Foreign currency borrowings will be affected by the fluctuation of the exchange rate. RMB appreciation will result in exchange profits. Eternal Asia Supply Chain Management Ltd. (002183.SZ) and Xiamen Xiangyu Co., Ltd. (600057.SH) face similar conditions.
Translated by Star Zhang
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