Winners and losers from a higher yuan
By
Euan Stuart Dec 12, 2005
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China has been the biggest story in the global markets for some years now. Everything from its imports to its exports, its eating habits, its oil consumption and the speed at which its middle class can grow has been analysed to death as commentators and forecasters try to figure out the extent to which events in this huge new economy will affect world markets. In recent weeks, however, attention has focused on one thing in particular: the real possibility that the Chinese government might release its (currently undervalued) currency, the yuan (renminbi), from its peg against the dollar and allow it to float.
Since 1994, China has kept the yuan pegged at 8.28 to the dollar and any revaluation from that level would be pretty modest to begin with, says James Flanigan in the Los Angeles Times. Experts predict Beijing will allow a rise of maybe 7%, to about 7.7 yuan to the dollar, but will still not allow the currency to be freely exchangeable internationally. Still, even a small move like this will excite the speculators: foreigners have been pouring into China to buy apartments and other property in the hope that a revaluation will make these Chinese assets worth more in their home currencies. And a revaluation, however small, will encourage them to place further bets.
But they shouldn’t place too many, says Andy Xie, an economist at Morgan Stanley. China is getting all it needs simply out of creating the expectation that it may revalue - something that isn’t really in its interests at the moment: China’s growth has long been dependent on its exports remaining cheap. Moreover, China’s export sector is largely foreign-owned and hence vital to the profitability of the corporate sector in the US and elsewhere. This state of affairs makes it unlikely that protectionist rhetoric in Washington against the fixed yuan will translate into real actions to restrict China trade in the near future. As foreign pressure is mostly talk, China can take time - the odds are that it will get away merely with managing the expectations of the West for another two years or so.
Still, investors and corporate executives need to take into account what a more valuable yuan will mean for stocks, says Keith Bradsher in The New York Times. For Romeo Dator, manager of the US Global China Region Opportunity Fund, a mutual fund in San Antonio, Texas, the unexplained 20-minute departure by the yuan from its usual trading range on 29 April - which many saw as a sign of things to come - was a signal to sell part of the fund’s holdings of PetroChina, China’s biggest oil producer. Dator believes petrochemical firms will be negatively affected: they sell oil and chemicals for dollars, but incur their costs in yuan. At least Petrochina won’t be suffering alone: thousands of small and midsize businesses in China that have thrived on exports are worried that their profit margins, already razor-thin thanks to the intensely competitive environment, will disappear with a rising yuan, say Bradsher.
So who will benefit? Firms that currently compete with Chinese exporters and those that have costs outside China but receive, or intend to receive, relevant percentages of their revenues in yuan. The picture is slightly unclear, given more than half of China’s imports are actually materials and parts that are assembled by Chinese workers for re-export, but the basic point holds: if you spend in dollars and earn in yuan, you’ll make money out of a revaluation.
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Euan Stuart
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