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Southeast Asian companies alarmed by weaker yuan

Laem Chabang Port in Thailand. Many countries in Southeast Asia are seeing exports to China decline.

BANGKOK -- China's successive devaluation of its currency is shaking up companies in Southeast Asia, spurring concern that an influx of cheap imports may pick up pace. 

     Chinese goods make up 30% of Vietnam's imports, the largest share. The economic standstill in China has led to lower demand for steel products in that country, and the steel is instead being exported to Vietnam and other places at low prices, said Tran Dinh Long, chairman of steelmaker Hoa Phat Group.

     That Vietnam's steel imports grew 15% from a year earlier in the January-July period seems to support his statement. Now the country is scrambling to find ways to deal with Chinese products, which are becoming more competitive as the yuan weakens.

     Work is underway in Vietnam to build its first integrated steelworks that includes a hot rolling mill, blast furnaces and other facilities. The project is led by Taiwan's Formosa Plastics, with Japan's JFE Steel also taking part.

     Indonesia's state-run Krakatau Steel is also wary of a flood of cheap Chinese imports. The company was in the red for three straight years through 2014. The government may move to strengthen import controls.

Shrinking exports to China

The Chinese economy is decelerating at a faster pace than Beijing expected, a factor that led to the yuan devaluation.

     Southeast Asian companies are concerned that exports to China will decline further as the weaker yuan reduces China's purchasing power. Vietnam increased exports to China by 22.4% year on year in the January-July period, but Indonesia's figure plunged 27.1% and Thailand, Malaysia and the Philippines recorded declines of 3.5% to 3.7% over the same term.

     One company whose exports might be affected is Malaysia's Sime Darby, owner of palm oil plantations covering nearly 6,000 sq. kilometers. The company's earnings are susceptible to fluctuations in palm oil prices and foreign exchange rates. Sime Darby is also facing unfavorable headwinds in its business selling luxury cars in China.

     At Banpu, Thailand's largest coal company, roughly 20% of sales are tied to China. The depreciation of the yuan will be a disadvantage in the short term, CEO Somruedee Chaimongkol said Friday. But if the Chinese economy improves, then demand will rise, she added. 

Fear of a stronger dollar

Companies holding greenback-denominated debt worry that the yuan devaluation will lead to depreciation of other Asian currencies and further strengthen the dollar, which makes debt payments a bigger challenge.

     Indonesian telecommunications company XL Axiata announced Friday that it will refinance part of its interest-bearing liabilities, which reached $1.55 billion at the end of June, into rupiah-denominated debt. The risk posed by currency exchange will be significantly lowered over the next three to six months, said Chief Financial Officer Mohamed Adlan bin Ahmad Tajudin. The company is busy trying to turning its earnings around after sinking into the red for the January-June half.

     Many airlines in the region are saddled with dollar-denominated debt. Thai Airways International had to report a foreign exchange loss of 3.67 billion baht ($104 million) in its April-June earnings statement.

     Philippine conglomerate San Miguel posted an 8% year-on-year fall in net profit to 16.9 billion pesos ($366 million) in the January-June half, weighed down by a foreign exchange loss of 1.1 billion pesos following the recent depreciation of the country's currency.

Governments forced to move

Company executives are watchful about which directions local currencies will go and how they will affect their earnings. Speculation abounds that the yuan will grow weaker and the dollar stronger, giving rise to selling pressure on Asian currencies. Financial authorities in the region now find themselves facing difficult decisions.

     The first one to make a move was Vietnam. On Wednesday, the country's central bank widened the dong's trading band to about 2% from around 1%, representing an effective devaluation of 1%.

     The Indonesian rupiah has accelerated its descent since Tuesday and is hovering at its lowest level in 17 years. The rupiah is undervalued, said Agus Martowardojo, governor of the country's central bank. He expressed a willingness to continue the bank's intervention in the forex market.


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