April 8, 2010 (Chinavestor) The U.S. is drumming up support for the revaluation of the Yuan, the Chinese currency. U.S. Treasury Secretary Timothy F. Geithner is meeting Chinese Vice Premier Mr. Wang Qishan today during an unscheduled trip to China after visiting India. The Yuan is in the center the of talks. While it is too early to tell what the outcome is going to be, let's just see what the potential fallout of such scenario, e.g Yuan appreciation, would mean for U.S. investors holding Chinese ADRs.
First and foremost, any sizable strengthening of the Yuan will increase the dollar value of Chinese companies giving U.S. based China stock investors an immediate gain. Reason being that while the Chinese company will make the same amount of profits in Yuan, that will translate to more in U.S. dollars thus bumping up share price in dollars. In other word, share price of Yanzhou Coal (SHA:600188) (NYSE:YZC) will remain the same in Yuan but will be increase in U.S. dollars.
When it comes to sectors, Chinese airliners are seen as winners of such scenario. Most Chinese airliners' debt is in dollars, result of aircraft purchases, while their revenue is in Yuan. When the Yuan buys more dollars, current debt payment will ease for airliners. But the problem is that the market has already been anticipating this scenario as is evidenced by the surge in share prices for China Eastern Airlines (NYSE:CEA) and China Southern Airlines (NYSE:ZNH). Nevertheless another bump up is likely to follow a sizable Yuan appreciation.
Chinese telecoms and other domestic consumption oriented stocks are going to benefit. Expect China Mobile (NYSE:CHL) and other Chinese telecoms to bump up.
Chinese exporters are adversely effected should the Yuan get stronger. But the whole idea is that a stronger Yuan will increase purchasing power of ordinary Chinese, strengthen the domestic market and ultimately spur consumption. Chinese exporters will be able to offset most export losses by turning back to their courtyard and ultimately will benefit from such development.
It looks to me that the Chinese policy makers will have to believe that domestic consumption is ready to take over from export drive growth. It was actually clearly demonstrated during the global economic crisis in 2008-2009. Now it's time to move on with the currency.