Date
8 December 2016
A significant portion of companies listed in Hong Kong generate the bulk of their businesses from China. Thus, a weaker yuan will weigh on their earnings. Photo: CNSA
A significant portion of companies listed in Hong Kong generate the bulk of their businesses from China. Thus, a weaker yuan will weigh on their earnings. Photo: CNSA

What does a weak yuan mean for Hong Kong equities?

The offshore renminbi recently tumbled to a six-year low. How will that affect Hong Kong equities?

Lots of Hong Kong-listed companies derive a significant portion of their earnings from China. A weaker yuan therefore hurts.

About 800 listed companies in Hong Kong, out of a total of nearly 2,000, generate over 90 percent of their revenue from China, involving a total of HK$11 trillion.

Another 281 of these companies derive 50 to 90 percent of their revenue from China, involving a total of HK$5.7 trillion.

This large exposure to mainland business explains why the yuan exchange rate and the overall earnings per share of Hang Seng Index components have a strong correlation.

The Chinese currency is expected to further drop to 6.94 against the greenback, or even 7.19.

As a result, earnings per share of Hang Seng constituents could fall 5.6 to 12.5 percent respectively from their current levels, based on regression analysis.

Some insurance players such as AIA Group (01299.HK) could benefit, however.

The weak yuan has driven many mainland Chinese to buy Hong Kong insurance policies.

In the first half, the industry’s sales to Chinese residents amounted to HK$30 billion, up 3.25 times from the same period last year.

In fact, AIA’s share price has moved pretty much in line with the renminbi since the start of the year, with a correlation of 0.728.

That said, investors should be wary of any new Chinese rules that would bar mainland residents from purchasing insurance policies in Hong Kong.

A weak yuan also means servicing US dollar debts would become a heavier burden for mainland firms.

But there is no need to be too concerned for now because only a small portion of their debts will be due in the next one to two years, according to data from the Shanghai Stock Exchange.

Airline companies are the exception. The sector generally carries a high proportion of dollar-denominated debts.

For example, about a quarter of Air China’s (00753.HK) borrowings are US dollar debts. A weaker yuan will inflate the repayment costs and most likely weigh on its stock price.

This article appeared in the Hong Kong Economic Journal on Oct. 27.

Translation by Julie Zhu

[Chinese version 中文版]

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RT/CG

Hong Kong Economic Journal chief economist and strategist

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