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01/01 19:30
China May Let Yuan Strengthen; Sinopec Would Gain (Update1)
By Michael Forsythe and Le-min Lim
Beijing, Jan. 2 (Bloomberg) -- China, whose economy has
outgrown its biggest rivals' for the past seven years, may
no longer need a weak currency to keep its edge. Executives
and analysts say a stronger yuan would lift company
earnings and economic growth.
Since China pegged the yuan at 8.3 to the dollar in 1995,
cheap exports have fueled a $199 billion trade surplus and
low manufacturing costs have drawn $308 billion in foreign
investment. China's growing clout as the world's largest
consumer market may help it sustain last year's 8 percent
economic growth rate, even with a stronger yuan making
exports costlier.
Some of China's biggest companies say they'd gain from a
stronger currency as they import more and expand overseas.
China Eastern Airlines Corp.'s fuel bill and foreign debt
burden would shrink. China Unicom Ltd. could buy imported
phone equipment more cheaply. Oilfields from Indonesia to
Algeria would cost less for Sinopec, the nation's largest
listed company.
``Overseas assets would be cheaper for us if the yuan
gained in value,'' said Shao Jingyang, a deputy director at
China Petroleum & Chemical Corp., known as Sinopec. A 5
percent gain in the yuan would also cut the cost of
Sinopec's planned 2003 oil imports by more than $100
million, based on current prices.
Motorola Inc. and other foreign investors say a stronger
yuan wouldn't make them leave. While costs would rise and
their exports would become more expensive in the U.S. and
elsewhere, China's market of 1.3 billion consumers is
reason enough to stay.
Boeing, Wal-Mart
A stronger yuan would make Boeing Co. planes and General
Electric Co. turbine engines cheaper in China, boosting
their exports and helping to narrow the U.S.'s largest
trade deficit with any country. Companies such as Wal-Mart
Stores Inc., which buys $10 billion in goods from China
each year, may suffer as China-made clothes, computer parts
and other goods became pricier.
Goldman Sachs Group Inc. estimates that the yuan is
undervalued by 15 percent. China is growing more open to
calls from Japanese Finance Minister Masajuro Shiokawa and
other foreign officials to let the currency appreciate,
analysts say.
Chinese Finance Minister Xiang Huaicheng said in November
calls for a stronger yuan have increased.
``I personally feel some pressure, and this is something
the U.S. is pondering,'' Xiang said. The U.S. trade deficit
with China widened to $83.1 billion in the first 10 months
of 2002 from $70.4 billion a year earlier.
The government will widen the range in which the yuan can
trade with the U.S. dollar within two years, effectively
strengthening the currency by as much as 5 percent,
according to six out of 10 economists surveyed by Bloomberg
News. Three expect no change during the period, and one
declined to give a forecast.
``It has always been in the cards to widen the band,'' said
Jonathan Anderson, Goldman's head of Asia-Pacific economic
research in Hong Kong. ``We think the time is fairly
ripe.''
12 to 18 Months
Goldman expects China to expand the yuan's trading range
within the next 12 to 18 months, initially moving to a 1
percent band from the current 0.2 percent.
China, which devalued the yuan by more than half before
fixing its value in 1995, still has plenty of reasons to
resist a stronger currency.
A weak yuan has helped swell the trade surplus in a country
that had a $12.2 billion deficit in 1993 -- especially in
2002, when the currency weakened in tandem with the dollar,
which fell 15 percent against the euro. China's economy
has grown an average 8.4 percent in the past seven years,
outpacing most in the world.
Letting the currency strengthen would make imported
agricultural goods cheaper, threatening China's farmers.
About 800 million of China's 1.3 billion people live in
rural areas.
A stronger currency would make China-made mobile phones,
toys and computer parts more expensive overseas. Even so,
foreign investors such as Motorola -- which plans to export
20 million mobile phones from China this year -- say the
advantages of staying in China would outweigh that risk.
Biggest Mobile Market
``One of Motorola's strategies for China is to build China
into a worldwide manufacturing center,'' said Tim Chen,
president of the company's local unit, which had $4.9
billion in sales last year -- the highest of any foreign
company. ``The China market, which is growing fast, has
great potential.''
The world's No. 2 mobile-phone maker controls about 30
percent of the domestic mobile-phone market, the world's
biggest with 200 million subscribers. Average wages in
China have more than quadrupled in the past decade,
government figures show.
China's biggest publicly traded companies, which have sold
shares to investors in New York and Hong Kong in recent
years, stand to gain more from a stronger yuan than they'd
lose.
Phone companies such as China Unicom, China Mobile (H.K.)
Ltd. and China Telecom Corp. would save on equipment they
buy from Lucent Technologies Inc., Cisco Systems Inc. and
Nortel Networks Corp. They're increasing such purchases as
they build advanced networks to attract higher-paying
customers.
`Too Weak'
The three phone operators, among China's top five publicly
traded companies by sales, have all sold shares overseas in
the past five years.
China's trading partners say its economy has outgrown the
value of its currency.
``Surely the yuan is too weak when we consider the current
strength of the country,'' Shiokawa said on Dec. 6. Japan,
China's No. 2 trading partner, is at risk of its fourth
recession in a decade as exports stall and manufacturers
such as Citizen Watch Co. move to China to cut costs.
The yuan would appreciate if the currency were allowed to
trade freely because of China's rising foreign-exchange
reserves, trade surplus and incoming foreign investment,
economists say.
Cheaper Planes
Growing domestic demand means Chinese companies are
importing more parts and materials and increasing overseas
investments.
China Eastern, the country's No. 3 airline, plans to
increase its fleet of Boeing and Airbus SAS planes to 100
by 2005 from 74 now. A stronger yuan would cut the cost of
new planes and imported fuel and trim the 22.6 billion yen
($190.4 million) the company owes Japanese lenders,
spokesman Luo Zhuping said.
Domestic carmakers, which produce almost exclusively for
the local market and use imported parts, would also gain.
``A stronger yuan would be good for us,'' said Zheng Gang,
a spokesman for Qingling Motors Co., which makes Isuzu-
brand pickup trucks in Chongqing in central China. ``We
could buy auto parts more cheaply.'' Japanese-made parts
accounted for about 30 percent of Qingling's sales costs
last year, he said.
For Wu Xinping, who sells knockoff Timberland hats and
gloves and trades currency on the black market in Beijing's
Silk Alley, a stronger yuan is already a reality. Wu used
to offer customers a premium for their U.S. currency. Now,
he gives them less than the official 8.28 rate when he
exchanges their dollars for yuan.
``A few years ago one dollar would buy 8.7 yuan,'' Wu said.
``Now the rate is 8.25.'' |
