Put that cork back in the champagne bottle. As the dust has
settled, it's increasingly clear that China's bold actions this
weekend regarding its
may be less bold than it seems. Clearly, the Chinese yuan will get
stronger and the U.S. dollar will get weaker, but it will take
several years -- or longer -- for any real positive benefits to be
felt. Nevertheless, you can identify the long-term winners and
losers from a stronger Chinese currency.
Watching Paint Dry
The Chinese government announced over the weekend that it would
loosen the fixed rate at which dollars and the yuan can be
exchanged, responding to increasing pressure from lawmakers in the
United States and elsewhere. That led to a quick +0.4% gain in
Monday trading for the yuan. And that's all you should expect for
the near-term. From time to time, the Chinese government will
slightly loosen the band further, and the currency will make
another quick +0.4% to +0.5% move. But we may not see more than a
handful of those moves each year. Translation: it may be several
years before the yuan gains +10% from current levels, even though
the currency needs to rise +20% to +30% from current levels to
really have major global impact.
Instead, the impact will be moderate, and will build over time.
With every move that China's
makes to let the yuan rise, Chinese firms will pay a bit more for
imported raw materials such as oil. And Chinese-made goods will
become a little more expensive. From 2005 to 2008, China let its
currency strengthen by +20%, though that rise was still not high
enough to meaningfully impact the stubborn U.S.-China trade
China is moving so slowly because it is not completely sure if the
move to a stronger currency is a clear winner for the country. As
it becomes more expensive to do business in China (in dollar
terms), factories may close and re-open elsewhere in lower-cost
countries such as Vietnam. As it stands, Chinese workers are
pushing hard for raises. The number of work stoppages roughly
doubled last year to around 700,000, according to Reuters. Strikes
at several factories have made global headlines, and the Chinese
government is looking for ways to ameliorate Chinese labor
concerns, perhaps by more strictly enforcing overtime rules or
raising the minimum wage. The more concessions that are made on
this front, the less likely it is that China will let its currency
get much stronger.
Building a Consumer Class
China knows that it cannot run massive trade surpluses forever, and
would love to see the emergence of a free-spending middle class. By
boosting domestic consumption, Chinese factories can stay busy,
even if exports start to shrink. Of course, China's trading
partners would love to see that as well. Boosting exports to China,
the world's most populous country, would provide a clear lift to
many U.S. and European firms.
Aiding imports and reducing exports could also ensure that China's
economy doesn't overheat. Investors are cheered by the fact that
China is now less likely to sharply boost interest rates to stave
off any inflationary pressures. Conversely, a stronger yuan would
add a bit of pressure to our
picture, as import costs rise.
Action to Take -->
China is going to move very slowly. Share price moves on Monday
appear to have captured much of the near-term gains associated with
any currency efforts. For example, aluminum and steel makers have
seen their shares rise +5% to +10% in Monday trading, even though
their full-year results are unlikely to see any real impact.
Investors instead like the fact that playing field will be leveled
over the coming years.
Chinese airline stocks look like a solid play on a rising yuan. For
China Eastern Airlines (NYSE:
is up +6% on Monday on the assumption that dollar-denominated fuel
costs will eventually fall, and Chinese domestic air travel will
eventually rise, as the economic focus shifts more toward domestic
Firms that cater to a growing Chinese consumer class will also
benefit. Video games makers such as
Perfect World (Nasdaq:
are up sharply on Monday on hopes that demand will rise. It also
helps that their earnings, when translated back into dollars, will
get a boost.
But many U.S. and European firms stand to lose. Many high-tech
companies such as
do the bulk of their manufacturing in China, and could be hurt by a
double whammy of rising labor discontent and a stronger yuan. Over
time, a number of multinationals may look to shift their
manufacturing bases to other parts of Asia, or even move some
production back home.
Purveyors of high-end goods may also benefit if a rising currency
and a rising upper-income class lead to more vigorous spending on
fancy watches, handbags and cars. That's precisely what happened in
Japan in the 1980s, and firms such as
Ralph Lauren (NYSE:
) and others became must-own brands in Japan.
Perhaps the clearest beneficiary of a stronger yuan would be the
American heartland, where so many factories have closed as
production moved offshore. If the rust belt can get up off the mat,
domestic spending in the Midwest may get a solid boost. As noted,
the benefits will be very slow to come, but may eventually have a
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.
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