Fitch: Yuan Devaluation Holds Mixed Impact for US Corporates

NEW YORK

China’s abrupt two-day yuan devaluation of 3.5% will likely have a mixed impact on US companies, according to Fitch Ratings. While the foreign exchange market has been volatile this year, China’s currency change will likely hurt foreign revenue and cash flow generated overseas by multinational issuers while some beneficiaries gain from cheaper imports. Ratings actions as a result of a moderately weaker yuan are unlikely.

China’s slowing economy along with the recent fall in share prices have harmed consumer sentiment and wealth and has already put pressure on US companies’ revenue generation in China. This is likely to pose the bigger challenge in the longer-term. Although, if the devaluation ultimately helps the Chinese economy and revives growth, that could actually be positive for US corporates’ sales in China.

Negative translation and transaction effects from yuan depreciation can affect a range of US corporates, particularly exporters. Companies selling in China may be impacted and this could be compounded if dollar-based commodities such as pulp and resins are imported for use in the manufacturing process. For the US original equipment manufacturers, the vast majority of the vehicles sold in China are manufactured in that country using locally sourced parts, so the issue is mostly one of currency translation.

In the consumer product sector, sales in China represent 8% of Procter & Gamble’s (unrated) revenues and are also likely to be near the same range for Colgate Palmolive Co. (‘AA-/Stable’) and Kimberly Clark Corp. (‘A/Stable’). We believe the negative translation will only add to what has been an already tough year for consumer product multinationals contending with double-digit reported sales declines in Latin America and elsewhere. Still, these types of companies in the Fitch-rated universe have significant financial flexibility at current rating levels.

Beneficiaries of the yuan devaluation will include companies who mainly import finished goods from China. Manufactured items will be less expensive on a US dollar basis. General merchandise retailers and the toy industry will be clear winners. For example, Fitch-rated entities Hasbro and Mattel source more than 70% of toys in China. Retailers – particularly clothing, shoe, furniture, and general merchandisers such as Target, Macy’s and Wal-Mart – will also benefit as these companies source a material portion of their products in China.

Costs of China-sourced goods are likely to decline in near lockstep with the currency devaluation percentage, assuming that the production contracts with manufacturing partners are transacted at local currencies at essentially spot rates. If production contracts are at fixed exchange rates but reset at later dates or with blended rates, the benefits will be muted in the short term.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM‘. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150814005515/en/

Fitch Ratings
Grace Barnett
Director
Corporates, Consumer Group
+1 212 908-1718
Fitch Ratings
33 Whitehall Street
New York, NY
or
Rolando Larrondo
Senior Director, Corporates
Group Credit Officer
+1 212 908-9189
Kellie Geressy-Nilsen
Senior Director
FitchWire
+1 212 908-9123
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com