China Yuan Revaluation May Aid Some Top U.S. Brands
Fri Feb 18, 2005 10:38 AM ET
By Daisuke Wakabayashi
BOSTON (Reuters) - General Electric Co. (GE.N: Quote, Profile, Research) , Procter & Gamble Co. (PG.N: Quote, Profile, Research) and other companies already entrenched in China could be the biggest winners if the Chinese government succumbs to Western pressure for a more flexible currency policy, investors say.
Look for established international brands -- such as Coca-Cola Co. (KO.N: Quote, Profile, Research) and Intel Corp. (INTC.O: Quote, Profile, Research) -- or companies with products to support China's construction boom to capitalize from a yuan appreciation.
A move to "revalue" the yuan by diminishing its fixed exchange rate, now pegged at about 8.28 yuan to the dollar, would boost the profit that American companies earn in China when repatriated back into U.S. dollars.
"As much as everyone talks about China, I think the U.S. equity markets have no idea how important this (a currency revaluation) will be," said Stephen Leeb, president of Leeb Capital Management.
U.S. and European companies argue that the decade-old currency peg does not accurately represent the yuan's value and gives Chinese manufacturers an unfair advantage in overseas markets by making their products cheaper than competitors'.
The dollar-yuan peg has meant the advantage Chinese manufacturers now enjoy has not diminished one bit even as the U.S. dollar over the last three years has lost major ground to other currencies like the euro or Japanese yen.
China, the world's seventh-largest economy with annual economic growth rates of nearly 10 percent, has pledged to shift toward a more flexible exchange rate, but has not set a timetable for a move.
In the case of yuan appreciation, Leeb points to P&G as one of his favorite stocks, because it already has factories in China and established distribution channels for its line-up of Pantene shampoos, Tide laundry detergent and Crest toothpaste.
In May 2004, P&G decided to go it alone in China and paid $1.8 billion to Hutchison Whampoa Ltd. (0013.HK: Quote, Profile, Research) to take full control of its Chinese joint venture.
Conversely, the yuan appreciation could prove costly for U.S companies, such as Walt Disney Co. (DIS.N: Quote, Profile, Research) , still considering significant investments in China.
Disney, which is mulling a plan to build a new amusement park in Shanghai, would have to pay more in U.S. dollars to fund investments in a post-revaluation China. In other words, an investment of say, $100 million, by Disney or other companies, would be worth less after converting to a revalued yuan than it is now.
EMPOWERED CONSUMERS
A move to revalue the currency, however, would also serve to empower China's 1.3 billion consumers.
"If the yuan appreciates and the Chinese domestic citizen has more purchasing power, it may actually help sales," said Jialin Yu, an assistant professor at Columbia University's Department of Finance and Economics in New York.
The currency markets are pricing in a modest appreciation. Chinese non-deliverable forward rates are implying a rate of 7.98 yuan per dollar, or an appreciation of around 3.5 percent.
U.S. equity investors, however, have not priced in a move, argued Leeb, who has moved some of his clients' money into shares set to cash in from a yuan appreciation.
"This (the currency impact) has gone over the head of most Wall Street analysts and I don't think it is priced in at all," Leeb said.
Even on the corporate side, companies are looking for how a revaluation could impact the bottom line.
GE Chief Executive Jeff Immelt said while an adjustment in China's currency rate would help it along with other U.S. firms, the company is not banking on it.
"We would expect to see some revaluation of the renminbi (yuan) in the future. We're not necessarily counting on it. We don't think it changes at all our prospect for growth in China," Immelt said in an interview with CNBC on Jan. 21.
General Electric, which targets $5 billion in revenue from China this year, said the country may spend as much as $300 billion to build out its infrastructure before the Beijing summer Olympics in 2008.
A yuan appreciation -- even a modest one -- could add significantly to its profit in a market already earmarked as one of its growth engines over the next few years.
United Technologies Corp. (UTX.N: Quote, Profile, Research) CEO George David has said the yuan is trading at half its real value against the U.S. dollar and any revaluation would have a significant impact.
"The renminbi (yuan) revaluation is coming," David told analysts in December. "There is a lot of pressure for that to happen -- this currency is way undervalued -- and when it does, it will change our numbers a fair amount."
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