Yuan Devaluation Would Prove Just Speed Bump for China ADRs

(Bloomberg) -- Chinese ADRs would take an immediate hit if the yuan were to depreciate, but the securities would quickly rebound, if history is any guide.

Back in August 2015, the securities sank on China’s surprise move to let its currency weaken by about 2 percent. A year later, with the yuan still weakening, the ADRs had stabilized, and then took off again as the currency strengthened.

The reasoning is mechanical: A Chinese company that sells its goods for yuan trades in the U.S. at, say, a multiple of 4:1. If the currency’s value were to fall by half, investors would expect to pay a multiple of 2:1 to keep the ratio constant.

"The biggest risk for any equity is the impact of a devaluation just as we saw in August of 2015,” said Brendan Ahern, chief investment officer at Krane Fund Advisors. "The material economic impact to the company is small, but there’s a definite headline risk."

Even so, any disruption in pricing is likely to be brief, according to Scott Snyder, a money manager at Icon Advisers whose fund outperformed 97 percent of peers this year. He’s overweight Chinese stocks and holds a below-benchmark position in ADRs.

“We don’t expect it to change much the long-term outlook,” said Snyder, who sees a 14 percent upside over fair value in Chinese equities, including ADRs. “Companies end up adjusting to currency fluctuations.”

--With assistance from Daniel Ralls (Bloomberg Global Data).

To contact the reporters on this story: Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net, Brandon Kochkodin in New York at bkochkodin@bloomberg.net.

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, Alec D.B. McCabe

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