The rise in the Chinese yuan has given equity investors a touchstone in their search for potential winners and losers.
The benchmark stock indexes in Hong Kong and the mainland have been supported by the recent strength of the yuan, as capital drives out assets denominated in a strengthening currency. The correlation between the Chinese benchmark CSI 300 and the strength of the onshore yuan is almost the highest in seven months, while the Hang Seng index is also the most linked to currency movements since February, according to compiled data. by Bloomberg. But not all actions are beneficial.
Likely winners include companies that can take advantage of currency dichotomies, including Chinese real estate developers with significant dollar debt and companies that generate most of the income on the mainland but are listed in Hong Kong, analysts said.
On the flip side of the monetary equation are the exporters, whose products will be less price competitive when sold in foreign markets.
The Chinese yuan has jumped 12% against the dollar since May 2020, with the rally accelerating recently amid inflationary concerns and the greenback’s weakness. Some investors expect the yuan’s rally to continue, although the central bank takes a measure to stem the gains.
“Central bank intervention will only slow the pace of appreciation, not the direction of appreciation,” said Jackson Wong, director of asset management at Amber Hill Capital Ltd. “A rising Chinese currency has historically a positive correlation with the mainland and Hong Kong benchmarks, although some sectors will suffer.”
- Borrowers in dollar debt: The companies that will benefit the most directly will be those that generate income in yuan while borrowing in foreign currency, as the debt is reduced. According to Bloomberg data, about 24% of the total outstanding dollar-denominated bonds issued by all Chinese companies come from developers.
- Chinese companies listed in Hong Kong, or H-shares: A stronger yuan bodes well for H-shares, as well as valuations and foreign capital inflows, CICC analysts including Hanfeng Wang said. While some investors may fear that a strong yuan may discourage southern inflows due to potential currency losses, historical experience suggests that such inflows are positively correlated with the yuan, as a stronger yuan generally suggests better ones. growth prospects for Chinese assets, Wang said.
- Consumer Businesses: A rising currency improves purchasing power and consumer confidence, which benefits the consumer sector, said Yang Delong, chief economist at First Seafront Fund Management.
Who loses :
- Labor-intensive exporters: manufacturers such as toy makers, which rely on cheap prices to attract customers and generate most of the income overseas, could take the hit of a stronger yuan, Zheng Jiawei, analyst at East Asia Qianhai Securities, wrote in a research report.
- Foreign Asset Owners: Textile manufacturers and machinery companies will suffer because they tend to have a large proportion of assets denominated in foreign currencies, said Cliff Zhao, head of research at CCB International.
– With the help of Jeanny Yu and Amy Li