Winners and losers of rise in renminbi

(BLOOMBERG) – China’s rising renminbi has given equity investors a touchstone in their search for potential winners and losers.

Benchmark stock indexes in Hong Kong and the mainland have been buoyed by the renminbi’s recent strength, as capital chases assets denominated in a strengthening currency.

The correlation between China’s benchmark CSI 300 Index and the onshore renminbi’s strength is near the highest in seven months, while the Hang Seng Index is also most linked to the currency’s movements since February, data compiled by Bloomberg shows. But not every share is a beneficiary.

Likely winners include firms that can take advantage of currency dichotomies, including Chinese property developers with sizeable dollar debt and firms that generate most revenue in the mainland but are Hong Kong-listed, according to analysts.

On the flip side of the currency equation are exporters, whose products will be less price-competitive when sold in foreign markets.

The renminbi has surged 12 per cent against the dollar since May last year, with the rally accelerating recently amid inflation concerns and the greenback’s weakness. Some investors expect the renminbi rally to continue, despite the central bank taking a visible measure to stem gains.

“The central bank’s intervention will slow down only the pace of appreciation, not the direction of the appreciation,” said an asset management director Jackson Wong of Amber Hill Capital. “A rising Chinese currency historically has a positive correlation with both mainland and Hong Kong benchmark indexes, though some sectors will suffer.”

Who wins

Dollar-debt borrowers: Companies to benefit most directly will be those that generate revenue in renminbi while borrowing in foreign currencies, as debt is reduced.

According to Bloomberg data, about 24 per cent of the total outstanding dollar-denominated bonds issued by all Chinese companies are from developers. China Evergrande Group and Country Garden Holdings are among the firms that have most outstanding dollar debt in China.

Hong Kong-listed Chinese firms, or H shares: A stronger renminbi bodes well for H shares, as well as valuations and foreign inflows, said CICC analysts, including Mr Wang Hanfeng. While some investors may worry that a strong renminbi could discourage southbound inflows because of potential foreign-exchange losses, historical experience suggests those inflows are positively correlated with the currency, as a stronger renminbi usually suggests better growth prospect for Chinese assets, Mr Wang said.

The Hang Seng China Enterprises Index has lost over 10 per cent since its February high.

Consumer companies: A rising currency enhances purchasing power and consumer confidence, which benefits the consumer sector, said Mr Yang Delong, chief economist at First Seafront Fund Management.

Consumer discretionary and staples firms are the worst-performing sector on the CSI 300 Index since the February high, Bloomberg data shows.

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Who loses

Labour-intensive exporters: Manufacturers such as toy makers, which rely on cheap prices to attract customers and generate most revenue overseas, may take a blow from a stronger renminbi, analyst Zheng Jiawei of East Asia Qianhai Securities wrote in a research report.

Foreign-asset owners: Textile manufacturers and machinery firms will suffer, as they tend to have large proportions of assets denominated in foreign currencies, said CCB International head of research Cliff Zhao.

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