How Do Exchange Rates Affect Company Performance?

How do exchange rates affect company performance?

Theoretically speaking, when the RMB price remains unchanged, the devaluation of the RMB will lead to more “cheaper” foreign currency pricing, which will enhance the competitiveness of domestic product exports and expand exports. Therefore, the beneficiary target of RMB depreciation lies in the industries with a high proportion of export enterprises.

According to the previous research report of China Merchants Securities, the exchange rate generally affects the performance of listed companies in three ways.

Indirect effects:

The impact of a country's exchange rate depreciation on exports is complex. For some enterprises with a large proportion of export revenue, when the domestic currency exchange rate depreciates, the foreign currency denomination of their export products will decline, and the product competitiveness will be relatively improved; the depreciation will be beneficial to the export of these enterprises' products.

direct impact:

For operating activities, if a company’s exports account for a relatively high proportion, and the exports generate or obtain more foreign currency currencies or accounts receivable, exchange gains will be generated within the depreciation range. Conversely, if a company imports a relatively high proportion of raw materials, and imports generate more accounts payable or bills payable, exchange losses will occur within the depreciation range.

For financing activities, when the RMB depreciates as a whole, both foreign currency liabilities and local currency assets are denominated higher. If a company's comprehensive foreign currency liabilities are higher than its comprehensive foreign currency assets, it will incur a net exchange loss.

Which industries benefit?

According to the statistics of China Merchants Securities in 2017, the industries with a high proportion of overseas revenue are concentrated in clothing and textiles, rubber, communication equipment, chemical products and so on.