NY Times on winners and losers from Chinese yuan revaluation

Here are key points from an article published in The New York Times (subscription required):

Romeo Dator, manager of the US Global China Region Opportunity Fund, a no-load mutual fund:

Who loses from revaluation?

• Petrochemical companies because they sell oil and chemicals priced in dollars but incur costs in increasingly valuable yuan.
• He recently sold a portion of the fund's PetroChina (ticker: PTR) holdings.

Leon Liu, a manager of the Xingan Quanyi Bamboo and Wooden Products Company, a manufacturer of wooden coat hangers for hotels and expensive retailers:

• A higher yuan will mean that bamboo grown near the company's factory in southernmost China will become too expensive.
• He is considering wood imports from Indonesia, and possibly opening a factory there.

Chen Kuang-ping, president of the Shunde Growth Corporation, a Taiwanese-owned company in SE China that assembles steel bookcases and other furniture from imported Taiwanese steel:

• A higher yuan could force the closing of the local factory, and a move to India in search of cheaper labor.

Some economists expecting a small revaluation:

• Even if China revalues, the value of the yuan is likely to change so little that it will have a modest effect on international trade and corporate profits.
• Others believe it could lead to a further surge of speculation.

UBS economist Jonathan Anderson:

• 85% chance that China will simply tweak its current peg. China will link the yuan to a basket of other currencies and then let the yuan rise by about 1-4% over the next year.
• 14% chance of a 5-7% revaluation.
• 1% chance of a 15-25% revaluation.

According to Anderson

….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. 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).

If there is a large revaluation, social instability may ensue because:

• Factories may be forced to shut down.
• Chinese food companies may stop buying from peasants and import instead.
• Chinese companies may suffer the consequences of losing speculative currency bets.

The most obvious effects of a revaluation:

• Imports cheaper in China.
• Chinese goods more costly in foreign markets.

Jun Ma, Deutsche Bank's chief economist for greater China:

• China likely to link the yuan to a basket of currencies and let the yuan rise 2-5% a year for many years.
• Biggest winners from revaluation: China's airlines - some could double earnings.
• Why airlines? Airlines are among the few businesses in China that have been allowed to borrow large amounts of dollars to purchase planes. 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.
• American companies that stand to gain?
  • Boeing (ticker: BA) - Exports aircraft to China.
  • Cisco (ticker: CSCO) - Sells telecom equipment to China.
  • Motorola (ticker: MOT) - China operations earn profits in yuan.

Other analyst recommendations of companies to benefit from rising yuan:

• Automakers.
• Specifically: General Motors (ticker: GM), Volkswagen (ticker: VLKAY.PK), and Shanghai Automotive.
• Auto assemblers in China are dependent on imports for everything from the high-finish galvanized steel for exterior body panels to safety-related systems like brakes.
• Companies like Ford (ticker: F) are quickly trying to find local parts suppliers.

According to a DaimlerChrysler executive:

• The company is negotiating to build and ship small cars from China to the US.
• China's edge in lower wages is so large that a revaluation of the yuan or wage inflation in China would have little effect.

Concerns for small and midsize businesses:

• Small and midsize businesses in China that have thrived on exports may see their small profit margins disappear with a rising yuan.

Comment: See one CEO's thoughts on how revaluation will affect his company here.