The Chinese government's devaluation of its Renminbi in the third quarter has hit domestic firms in a number of ways.
The impact is direct and straightforward for companies with outstanding debts denominated in U.S. dollars, such as automotive compounder Shanghai Pret Composites Co. Ltd., which borrowed about $50 million from the bank to finance its acquisition of U.S. plastics recycler WPR Holdings LLC earlier this year. The deal, completed in February, had a price tag of $70.451 million.
As China's policymakers weakened the yuan, especially with the drastic moves in Aug., Pret said its financial expenses in the third quarter nearly tripled. That sharp increase, valued at 35.57 million yuan, dented Pret's net profit in the third quarter, which was recorded at 62.22 million yuan.
The fall of the yuan also affected Chinese companies with dollar-based procurement contracts. China's largest plastics compounder Guangzhou Kingfa Science & Technology Co. Ltd. reported a negative impact on its third quarter profit, since part of its raw material purchasing is settled in U.S. dollars.
“Thanks to the weakening yuan against the dollar in the third quarter, our plastics raw material procurement encountered fairly large currency exchange losses,” the company said in its financial report.
Behind Beijing's decision to devaluate its currency is the intention to boost China's export while the country loses its cost competitiveness in a slowing global economy. Last week, an official from the General Administration of Customs said in a televised press conference that the currency adjustments are expected to benefit exports. In particular, the spokesman confirmed that the sizable devaluation in August had a positive impact on exports.
Although China has seen its overall exports declining since the second quarter, the Customs official predicted a rebound in the fourth quarter. In fact, China's monthly export decline has been narrowing, from 9.5 percent in August, to 6.1 percent in August, and to 1.1 percent in September.
However, in reality, Chinese exporters might not be able to pocket the currency-based gains. A recent report from the Beijing News quoted a manufacturer of plastic and home decor products in the Pearl River Delta saying that the company is pressured by its customer Wal-Mart Stores Inc. to give a 3 percent concession on prices. Wal-Mart believes that Chinese suppliers should pass on their cost savings enabled by China's currency devaluation, the report said.
The unnamed plastics company said it's unwilling to accept the terms and is currently in negotiation with Wal-Mart.
Customs data shows that China exported 820,000 tons of processed plastic products in September, a 14.6 percent drop from the previous month. However, dollar value increased 3.5 percent month-on-month to 2.1 billion yuan.
In the first nine months, China's plastic products export grew by a mere 2.7 percent on a weight basis or 1.9 percent on a dollar basis, compared to the same period last year.