Firms cut dollar debt to lower their risks

Depreciation of yuan is forcing companies to reduce their debt burden in the US currency as further volatility is possible

The depreciation of the yuan has prompted several Chinese companies to take measures to cut their dollar-denominated debt.

During the first week in January, the People's Bank of China, the central bank, surprised markets by setting the official midpoint rate on the yuan as low as 6.5646 per dollar, the lowest since March 2011.

The currency's value against the dollar edged up slightly on Jan 11 as the bank set the midpoint higher, but analysts were predicting more depreciation in coming months.

The PBOC's China Foreign Exchange Trade System reiterated on Jan 7 that there was no basis for the yuan's continuous depreciation and that it was stable against a basket of currencies in 2015. The bank lets the currency rise or fall by a maximum of 2 percent on a daily basis as the country moves toward a more open currency.

Still, the swings have left the markets perplexed.

Companies that have piled up dollar debt in the past are looking to reduce their debt burden at a time when the economy is slowing sharply.

Geoffrey Cheng, head of transportation and industrial research at BOCOM International Holdings Ltd, a research firm, says: "Reduction of dollar debt is the best option for Chinese companies to cut foreign exchange losses."

Some companies had taken similar measures during the yuan depreciation in 2015.

Sany Heavy Industry Co Ltd, the Beijing-based equipment manufacturing giant, says it started to reduce its foreign exchange loans in 2015.

The company cut its forex loans from $3.72 billion at the beginning of the year to $2.15 billion by the end of October 2015, according to data provided by the company. "The adjustment of the forex loan structure will help reduce losses," it said.

China Eastern Airlines Co Ltd, one of the major carriers in China, says it is repaying debts worth $1 billion as part of its ongoing efforts to cut dollar-denominated debt.

"In the short run, the airline will take more steps to further optimize its debt structure, so that its dollar debt ratio can attain reasonable levels," China Eastern said in a statement.

China Eastern's dollar-denominated interest-bearing liabilities accounted for 79.24 percent of its total interest-bearing liabilities in the first half of 2015, while the same was 81.14 percent by the end of 2014.

"The carrier plans to reduce the ratio of dollar-denominated liabilities to 50 percent or 60 percent by the end of this year," says a senior executive of China Eastern, who declined to be identified.

Hedging contracts for foreign currencies is another option that the carrier may consider for reducing forex risks, he says.

Almost all the domestic carriers are reeling from the recent yuan depreciation as aircraft purchases are mostly conducted in dollars, which swells their dollar-denominated liabilities.

The financial expenses of China Southern Airlines, the largest carrier in Asia in terms of fleet size, increased by 142.52 percent in the third quarter of 2015, compared with the same period of 2014, due to forex losses.

The yuan swings have not spared the smaller carriers, though they have not always been hit as hard.

"Our losses from currency swings are not as serious as the large carriers," says Zhang Wu'an, spokesman for Spring Airlines, China's first publicly listed carrier. He also advocates reducing dollar debt to avoid risks.

Unlike big carriers, Spring Airlines is not considering hedging of contracts, he says.

Zhang Yugui, dean of the economics and finance school at Shanghai International Studies University, says: "Currency swings are a macroeconomic issue and something that can only be resolved at the macro level. There is very little that companies can do about it."

Lyu Chang contributed to this story.

wangwen@chinadaily.com.cn

(China Daily Africa Weekly 01/15/2016 page25)