Assuming China is both serious and quick to act in its stated CNY revaluation, then the news is a likely game changer for markets, certainly in the near term, because it is a genuine boost for risk appetite that has been sorely lacking from markets for the past months and provides a critical counterweight to the unending news of stagnation or sovereign default worries from most of the developed world.
If in fact China takes concrete steps to revalue the yuan, the move is viewed as positive for risk assets because:
- Anyone who earns more in yuan than they pay out will benefit. Thus those importing to China get a boost, those manufacturing in China and exporting most of that production (rather than selling it in China) will see their costs rising and be hurt.
- The rest of the world’s goods become more competitive vs. those of China, increasing export revenues worldwide.
WINNERS AND LOSERS:
- Those selling to China, most major multinationals and especially the big commodity exporters, will earn more, as will those already established in China’s retail sector, like major multinational automakers (VW (OTCQX:VLKAY), BMW) and fast food chains (NYSE:YUM).
- Chinese firms that import most of their inputs (airlines, manufacturers) AND sell mostly to the domestic market will benefit to the extent that savings are greater than loss in revenue from exports. Examples include Chinese airlines and those primarily selling imported goods and services to China (aerospace, computers, consulting, specialty heavy equipment, etc).
- Those dependent on Chinese products will suffer, but China makes few goods that can’t be gotten elsewhere. Major importers from China like Wal-Mart (NYSE:WMT) should suffer, as will Chinese exporters, which will need to focus more on the domestic market.
- The move also potentially diffuses a destructive potential trade war between China and the US, which has been openly losing patience with China’s currency policy, which the US and others asserted gave China an unfair export advantage. The issue was due to be raised at this coming weekends’ G20 meeting but is now likely to be pushed off as nations give China more time to activate its new policy.
- The move is likely to accelerate foreign investment in China’s retail sector as CNY earnings now become more attractive
Because China is a major buyer of commodities, commodities and commodity-based currencies have also been immediate beneficiaries of the move, particularly the AUD, NZD, and CAD.
Again, the key to whether these become longer term trends will depend on the degree and speed of the revaluation. While that is a subject of intense debate, we suspect the Chinese will take a gradual approach to revaluation, and will not hesitate to slow or halt the process if global growth should falter or reverse.
Disclosure: No positions