Wednesday, July 27, 2005

A key beneficiary of China's currency repegging 1 comments



(P.S: Sorry for any disturbances the advertisements above may have caused you)
China has finally allowed its renminbi to operate on a managed float. This was always inevitable, and might have been delayed until now precisely because of foreign pressure; China's government wants to show that it does not bow to ang-mohs.

And again, no matter how many times the Chinese deny that this revaluation move is just the start, it is very likely that there is going to be further upward move of the currency as its volume of trade and trade balance continue to grow.

There has been a great deal written about Chinese companies operating in the domestic market benefiting from this, due to asset appreciation and higher earnings (when converted to US$) but I think one of the greatest beneficiaries has to be global exporters of capital equipment. These are the machinery and equipment used to manufacture products in wafer plants, EMS companies, automotive companies, consumer products factories etc. The effects of the renminbi revaluation on domestic consumption in China might be overestimated because the majority of mainland Chinese are hardly affluent by any means; those who can afford to spend now would have been able to spend before the revaluation, while the poorer ones are not going to spend much more because of it. On the other hand, it is clear that economic growth is a key target of the Chinese government, and I suspect part of the reason for the revaluation is to allow local companies to import foreign machinery at cheaper costs. It ties in with the drive to produce more China companies that can compete globally, as the next step following the successful import of foreign investment capital that has made China the workshop of the world.

Japanese companies are likely to be the chief exporters of such capital goods, given their close trade links with the mainland (despite all that tension over WW2 recently) and their strong expertise in this area. At the same time, it appears they are seeking alternative production bases (a so-called "China plus one" policy) for outsourcing given the poor political relations. Thus it looks like they will be importing capital equipment into China but withdrawing capital at the same time. This could be the true legacy of the currency revaluation, and it might include not just Japan.

 

 

1 Comments:

Blogger decipher said...

hi there,

I enjoyed reading ur blogs and it has been really educational to read the fundamental side of the market. I am basically a Technical Anaylst and know next to nothing about fundamentals and has been learning.

Keep it up!
Decipher

7/31/2005 10:35 PM  

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