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By Christopher Langner at Bloomberg
It's about to become clear just how much pain the recent devaluation of the yuan caused to Chinese companies. As earnings season accelerates in Hong Kong, Shanghai and Shenzhen, investors can brace themselves for larger losses from foreign exchange and rising interest expenses. That's just the beginning.
With the yuan having reversed course from steady appreciation to rapid devaluation, companies such as developer Shimao are griping about rising interest costs and trying to replace foreign debt. Any such move will come too late to save investors from sharing the pain. There are more than 200 publicly traded Chinese companies which have issued bonds in either U.S. or Hong Kong dollars and publish financial reports in yuan. All added, they have more than $364 billion in syndicated loans and bonds in the two currencies.
As a result, companies that borrowed overseas were able to book foreign-currency gains on their debt for several years. No longer:
Apart from causing paper losses, the drop in the yuan is having a real cash impact on these companies. Their cost of meeting interest payments is rising in tandem with the U.S. dollar's climb. Developer Sunac China Holdings, for instance, saw its interest expenses jump more than 10 times in the past five years to 1.4 billion yuan in the period ended June 30. The company sold its first dollar bond in 2013 and now has some $9 billion of debt in the currency.
Like Sunac, many issuers get paid mostly in yuan, which will increase the pain if the currency continues its downward trend.
This earnings season, investors would do well to skip past the net profit figure and go straight to the comprehensive income, where foreign-currency gains and losses are stated. Be prepared, though: It's likely to be an unsavory sight.