Impact of Yuan Flexibility on Chinese Companies
China’s Ministry of Commerce is on the wires saying it will monitor the yuan reform impact on Chinese export companies. While China is a big exporter it is also a significant importer as well. The increase in the yuan’s value may increase the price of exports, though we are skeptical on the grounds that yuan-denominated inputs are estimated at a modest 12-25% the cost of production. In addition, an increase in the value of the yuan will also reduce the cost of imports, which are often denominated in dollars( such as raw materials and semi-finished goods).
There seem to be three channels in which an increase in the yuan can impact Chinese companies. First, revenue/cost shifts. Chinese airlines, for example, have largely dollar costs (fuel and the planes themselves) and primarily local revenue. This is a favorable and some equity analysts are highlighting Chinese airlines as a potential beneficiary of an appreciation of the yuan. The opposite may apply to other industries, like oil. The revenue is primarily in dollars, but the costs are largely domestic.
The second channel is their earning translations. Chinese companies that earn dollars from their foreign sales would be vulnerable as their dollars will not translate into as many yuan. The third channel is the competition (between US and Chinese) companies in a different market. To the extent there is such competition, which we suspect is limited, a rising yuan would theoretically increase the Chinese companies’ cost structure.
In terms of Chinese trading partners, the EU is the biggest at about 16.3%, the US is second just below 13%, ASEAN is 10%, Japan is 9.4% and Hong Kong (which is also the dollar) is 7.5%. If you grant the HK and US exposure together is a little more than 20%, which roughly the size of ASEAN plus Japan.