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
inflation
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
example,
China
Eastern Airlines
(NYSE: CEA) 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
consumption.
Firms that cater to
a growing Chinese
consumer class will
also benefit. Video
games makers such as
Perfect World (Nasdaq:
PWRD) 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
Apple (Nasdaq:
AAPL) and
Motorola (NYSE: MOT)
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
Coach (NYSE: COH),
Ralph Lauren
(NYSE: RL) 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
real impact.
