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Wednesday, August 12, 2015, 08:52

Yuan devaluation may trigger capital outflows

By Celia Chen in Hong Kong

Hong Kong’s benchmark Hang Seng index closed 0.1 percent down to 24,498.21 on Tuesday, erasing its gains in early trading after the mainland devalued the renminbi by cutting the daily reference rate against the US dollar by 1.9 percent.

“The great risk of renminbi’s devaluation is that it could trigger a capital outflow from the mainland and Hong Kong markets,” said Hanna Li Wai-han, a strategist at UOB Kay Hian (Hong Kong) Ltd.

Li said that the core business of many Hong Kong companies is going to be affected by the renminbi devaluation and that would eventually determine their share prices.

Stock analysts in Hong Kong said they expected that currency devaluation could help stimulate the nation’s export growth. “We calculate a 10-percent depreciation of yuan would take Chinese mainland export growth back to 10 percent year-on-year,” Bloomberg Economist Tom Orlik wrote in a report.

Unsurprisingly, investors were betting heavily on those mainland companies who are heavily dependent on exports. The shares of Man Hua Holdings Ltd, an exporter of sofas, soared 9.5 percent to HK$7.98 on Tuesday. Techtronic Industries Co Ltd, which produces power tools for export, jumped 6 percent to HK$29.

Kenny Tang, chief executive officer of Jun Yang Securities Co Ltd, also showed his concerns of capital outflows. Tang said he was confident that the devaluation can help some mainland companies to improve their profitability, though.

But those enterprises, such as airlines and importers, which have large foreign currency payment commitments, were taking a beating. For instance, the shares of Air China dropped 12.8 percent and China Southern Airlines slumped 18.1 percent in Hong Kong because of investors’ concern that a weaker renminbi would increase the cost of servicing their US dollar-denominated debt.

“The mainland authorities must try to strike a balance between promoting export growth and containing capital outflow risks,” Li warned. The stock markets of both Hong Kong and mainland are expected to come under growing pressure if renminbi enters a devaluation trend, she said.

Tang expected the change was a one-time move, and the mainland central bank said that it would begin to use the market closing, not the previous morning’s official setting, to calculate the renminbi’s official daily fixing against the US dollar.

Renminbi’s devaluation comes when a recent slew of data shows decelerating growth for the country’s economy, while weekend reports showed exports dropped more than expected.

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