China’s airlines and commodities companies, which would benefit from yuan gains that reduce the cost of their overseas purchases, may lead stock gains after the central bank signaled an end to the currency’s peg to the dollar.
The People’s Bank of China pledged to make the yuan more flexible, while ruling out a one-time revaluation of the currency that’s been held at about 6.83 yuan per dollar since mid-2008. A stronger yuan would help airlines reduce dollar- denominated fuel bills and debt incurred from buying Boeing Co. and Airbus SAS planes. Raw materials costs for companies such as China Petroleum & Chemical Corp. would also fall.
Yuan-denominated shares in Shanghai and Shenzhen will rise today as an appreciation of the currency will also help curb inflation and bolster purchasing power in the world’s fastest- growing major economy, according to China International Capital Corp. and Societe Generale SA. China’s benchmark Shanghai Composite Index gained 2.5 percent the day after the nation ended a decade-long peg to the dollar in July 2005.
“An appreciation in the yuan will reduce inflationary pressures and benefit consumption by increasing purchasing power,” said Shi Bo, general manager of Shanghai Elegant Investment Co., which oversees about $278 million in assets. “On balance, a strong yuan is good for China’s efforts to rebalance its economy away from exports to domestic consumption.”
The central bank said June 19 that it will “increase the renminbi’s exchange-rate flexibility” after the economy grew 11.9 percent in the first quarter.
Benefits Employment
An appreciation of the yuan, also known as the renminbi, will benefit exporters and the nation’s employment situation more than it hurts them, the central bank said in a statement. A more flexible currency would also help to curb consumer-price gains, asset bubbles and dependence on exports for growth, it said.
After China’s revaluation of the yuan in July 2005, China Eastern Airlines Corp. climbed 7.1 percent in Shanghai trading and China Southern Airlines Co. rose 4.8 percent. China Petroleum & Chemical, also known as Sinopec, gained 5.8 percent.
“If it leads to appreciation for the yuan, it’s good news for the market,” Hao Hong, global equity strategist for CICC in Beijing, said in a report yesterday. “Investors will want to get into Chinese assets because they will be worth more.”
An appreciation of the yuan would benefit Chinese airlines, Luo Zhuping, China Eastern Airlines Corp.’s board secretary, said in an interview yesterday. Foreign-currency debt accounts for about 60 percent of the company’s total debt, Luo said. Yuan gains “will help reduce the burden,” he said.
Biggest Boost China Eastern, the nation’s second-biggest airline, would get the biggest profit boost from yuan appreciation of the country’s three largest carriers, Citigroup Inc. said in April. China Southern, the biggest carrier, would gain most in absolute terms as it has the largest debt and fleet, Citigroup analyst Ally Ma said. Air China Ltd. would benefit least as it has the highest proportion of overseas sales, Ma said.
Sinopec, Asia’s biggest refiner, would also benefit as 75 percent to 80 percent of oil it processes by volume is purchased from overseas in U.S. dollars, spokesman Huang Wensheng said.
“If the ability of domestic consumers to take on higher costs increases and the cost of our overseas purchases decreases, then the result for us is an obvious one,” Huang said yesterday.
BHP, Rio Tinto
BHP Billiton Ltd., Rio Tinto Group and other raw materials suppliers to China may also benefit as a stronger yuan reduces the cost of importing commodities from overseas. The nation is the world’s largest consumer of materials including iron ore, copper and soy beans, and the second-biggest energy consumer. Australian mining companies BHP Billiton and Rio Tinto are the world’s largest iron ore suppliers.
“You’d have to nominate BHP and Rio Tinto as the two main candidates to benefit,” said Saxon Nicholls, a fund manager at Herschel Asset Management Ltd. in Melbourne who helps oversee $785 million. “We think it’s good for commodity prices themselves. We also think it’s actually good for the value of the commodity equities.”
As an appreciation of the yuan reduces the cost of importing commodities, it may also make Chinese exports of clothing, shoes and electronics less attractive, said David Cohen, an economist at Action Economics in Singapore. Companies that may be affected include Shanghai Zhenhua Heavy Industry Co. and Hon Hai Precision Industry Co., based in Taipei.
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