The Chinese central bank’s sudden move last weekend to expand the renminbi’s daily trading band has led to a drop in the unit’s exchange rate over the past four trading days. The fall accelerated on Thursday, sending the rate to a one-year low of 6.23 against the US dollar.
That was the level that prevailed in November 2012. The currency then swiftly appreciated the next year. Yet, it took only a month to erase all the gains.
The Hong Kong Economic Journal’s EJ Tactics column examines the potential impact of the currency movement on airline firms, which have traditionally resorted to US dollar borrowings to finance aircraft purchases.
A key factor behind the renminbi’s lost momentum is a decline in fund inflows into China. The Asian giant saw its exports slide 300 billion yuan in February from the previous month. Slower economic growth has only added to the pressure on fund inflows. Adding to the problem is a stronger dollar amid the Fed’s tapering of its bond purchases, and China’s own efforts to keep a lid on hot money.
A weaker yuan may have significant impact on airlines, among some other firms. In recent times, Chinese airlines had reaped foreign exchange-related gains as the renminbi kept rising. But now, with the situation changing, the carriers are likely to experience something that rarely happened in the past few years — paper losses in foreign exchange.
During the first two months this year, the renminbi has depreciated 0.1 percent and 1.38 percent respectively. A further 1.3 percent loss is expected in March.
Mainland airline companies import a large number of aircraft, which are priced in US dollars. This is why their liabilities are mostly denominated in the greenback.
Air China (00753.HK) has 70 percent of its total liabilities denominated in the US dollar, while 95 percent of the foreign debt that China Eastern Airlines (00670.HK) holds is in the US currency.
China Southern Airlines (01055.HK) also has 90 percent of its total debts denominated in foreign currencies, of which over 90 percent is in US dollars.
The big three carriers made a combined profit of 2.18 billion yuan in the first half last year. In the same period, forex gains for Southern Airlines, China Air and Eastern Airlines stood at 1.44 billion yuan, 1.12 billion yuan and 1.17 billion yuan respectively, or a combined 3.73 billion yuan.
Now that the renminbi is falling, the carriers are facing severe losses in foreign exchange that may take away their cumulative currency gains in one go.
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