Emerging Markets Investor: News
By Gordon Platt
The People’s Bank of China last month announced that it would allow the renminbi to trade more flexibly, bringing an end to the currency’s two-year-old peg to the dollar. While any increase in the renminbi’s value is expected to be gradual, the move will have varying effects on China-based companies.
In general, an increase in the value of the renminbi will increase the price of China’s exports and reduce the cost of its imports, which are often denominated in dollars. There are three channels through which an increase in the currency can impact Chinese companies, says Marc Chandler, global head of currency strategy at Brown Brothers Harriman, based in New York.
First, there will be revenue and cost shifts. Chinese airlines, for example, have largely dollar-denominated costs for fuel and planes. They also have mainly local revenue. “This is favorable for them, and some equity analysts are highlighting Chinese airlines as a potential beneficiary of an appreciation of the currency,” Chandler says.
Second, Chinese companies that earn dollars from their foreign sales will be vulnerable, as their dollars will not translate into as many renminbi, Chandler says. The third channel is the competition in third markets between companies based in the US and those based in China. “To the extent there is such competition, which we suspect is limited, a rising renminbi would theoretically increase the Chinese companies’ cost structure,” Chandler says.