As speculators across Asia place ever larger bets on a revaluation of China's currency soon, investors and corporate executives alike are trying to prepare for what a more valuable yuan will mean for stocks and companies.
For Romeo Dator, the portfolio manager of the US Global China Region Opportunity Fund, a no-load mutual fund in San Antonio, a 20-minute departure by the yuan from its usual trading range on April 29 was a signal to sell part of the fund's holdings of PetroChina, China's biggest oil producer.
"Who would be impacted negatively?" Dator asked. "Definitely the petrochemical companies," reasoning that they sell oil and chemicals priced in dollars but incur costs in increasingly valuable yuan.
PHOTO: NY TIMES
For Leon Liu, a manager of the Xingan Quanyi Bamboo and Wooden Products Co., a manufacturer of wooden coat hangers for hotels and expensive retailers, a more valuable yuan will mean that bamboo grown near the company's factory in Rongjiang Village in southernmost China will become too expensive. He is considering wood imports from Indonesia, and possibly even opening a hanger factory there.
And for Chen Kuang-ping, the president of the Shunde Growth Corp., a Taiwanese-owned company here in southeastern China that assembles steel bookcases and other furniture from imported Taiwanese steel, a higher yuan could force a decision to close the local factory and move to India in search of cheaper labor.
"It would affect us a lot," Chen said. "We prefer the yuan to stay where it is."
But while a strengthened yuan might cause hardships for some companies and industries, others -- both Chinese and foreign -- are likely to come out ahead.
Most economists who follow the pronouncements of Chinese officials closely say that managers and investors are paying far too much attention to the Chinese currency, which has been pegged to the dollar for years -- that even if China does act soon, the value of the yuan is likely to change so little that it will have a very modest effect on international trade and corporate profits. The April 29 shift was, after all, just six-thousandths of a yuan.
Jonathan Anderson, an economist at UBS, predicts there is an 85 percent chance that China will simply tweak its current peg of 8.277 yuan to the dollar. He forecasts that Beijing will instead link the yuan to a basket of other currencies and then let the yuan rise gradually, by perhaps 1 percent to 4 percent over the course of the next year.
Anderson says there is a 14 percent chance that the yuan, also known as the renminbi, will be revalued by 5 percent to 7 percent, and just a 1 percent probability of a big revaluation of 15 percent to 25 percent.
"From a macro point of view the `renminbi question' has to be one of the most -- nay, perhaps the most -- overly hyped themes in the market today," he wrote in a research report. "Any reasonable adjustment scenario would have very little near-term impact at home, equally little near-term impact on China's neighbors" and essentially no effect on the United States.
But the possibility that China might revalue the yuan by even 5 percent -- a move the euro or yen has sometimes managed in days or weeks against the dollar -- has prompted a deluge of analysis. Some of the analysis remains valid, experts say, even if China lets the yuan move by only a percentage point or two at first but permits larger fluctuations later.
For China, a small move of a few percentage points now runs the risk of a further surge in the flood of speculative investment already pouring into the country, as foreigners buy up apartments and other property in the hope that it will be worth more in their home currencies after further revaluation.
But a big revaluation soon would create the risk of social instability if factory presidents like Chen shut operations, if Chinese food companies stop buying from peasants and import instead, and if Chinese companies find themselves on the wrong end of too many speculative bets on the currency.
The most obvious effects of a revaluation would be to make imports cheaper in China and make Chinese goods more costly in foreign markets. The Bush administration has led efforts, increasingly supported by European nations and Japan as well, to persuade China to let the yuan rise.
The picture is blurred, however, because more than half of China's imports are materials and parts that are assembled for re-export by Chinese workers earning as little as US$0.50 an hour. A company running such an operation saves only on the portion of costs incurred in China, which may be less than a tenth of the retail price overseas for products like DVD players and other consumer electronics.
Jun Ma, Deutsche Bank's chief economist for greater China, has estimated the immediate effects on earnings in various industries of a quick 5 percent revaluation in the yuan, though he said Chinese authorities were more likely to link the yuan to a group of other currencies and then let it rise 2 percent to 5 percent a year for many years.
According to his estimate, the biggest winners by far from revaluation would be China's airlines, with some of them perhaps doubling their modest earnings. That is largely because airlines are among the few businesses in China that have been allowed to borrow large sums of dollars, for the purchase of planes, and they would be able to repay these loans with the proceeds of mostly domestic tickets sold for increasingly valuable yuan. Jet fuel would become cheaper as well in yuan terms, because it is priced on international markets in dollars, Ma said.
Three possible American beneficiaries of a rising yuan, he said, are Boeing, with its aircraft exports to China; Cisco, with its sales of telecommunications equipment; and Motorola, with its large operations within China earning profits in yuan.
Many analysts say the other winners would be automakers, notably market leaders in China like General Motors, Volkswagen and Shanghai Automotive.
Auto assemblers in China export few cars yet, and remain heavily dependent on imports for everything from the high-finish galvanized steel for exterior body panels to safety-related systems like brakes. Jim Padilla, the chief operating officer of the Ford Motor Co, and other executives said at the Shanghai Auto Show in late April that they were trying to find local parts suppliers as quickly as possible.
Some importers may even become exporters. Dr. Ruediger Grube, a DaimlerChrysler executive president, said that the company was negotiating to build and ship small cars from China to the US. He added that China's edge in lower wages was so large that a revaluation of the yuan or wage inflation in China would have little effect.
Most multinationals doing business in China have stopped commenting on the potential value of the yuan, partly because they see it as futile to guess what will happen but also because they wish to avoid offending leaders in Beijing, who have repeatedly objected in recent months to international pressure to let the yuan rise.
But the thousands of small and midsize businesses in China that have thrived on exports are clearly worried that their profit margins, already razor-thin, will disappear with a rising yuan. China's state-controlled media has been full of warnings of a possible rise in the yuan for the last couple of years, and equally full of advice on how to stay competitive overseas.
Liu, the coat hangar manufacturer, has followed those lessons and readily repeats them as his company's plan.
"We have to raise the quality of the product and improve the styling," he said, describing a strategy that could someday put even more Chinese companies in competition with American rivals producing high-quality goods.
"Until now," he added, "we've only paid attention to exports, but now we'll have to focus on the domestic market, too."
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