Equities got a quick boost from a stronger yuan, but US MNC treasurers would rather it be fully convertible than appreciating.
News of China’s new yuan flexibility regime has been played up in the financial press as reason for equities to rise. While MNC treasurers with significant earnings in China will enjoy the bounce, they probably know there is no reason to get too excited about the yuan yet.
On Saturday, the Peoples Bank of China announced that it would allow more yuan flexibility, letting market observers interpret this as allowing it to appreciate, although it said it was not altering the 0.5 percent band against the dollar. The statement stressed the importance of its trade-weighted basket of currencies and downplayed the importance of the dollar-peg. This led many to predict a continuation of a strong-yuan trend, although more cynical analysis suggested that the Chinese mandarins are simply letting people think they hear what they want to hear. And anything that takes the focus off the eurozone sovereign debt crisis and its spillover effects on European banks is welcome news, so why not play up China?
Good news in principle…
Whether a strong yuan has an impact on your company depends on its cost/revenue structure. Dollar costs to produce in China are already on an upward path, with real signs of labor unrest to boot in recent weeks, and a rising yuan sentiment will help this trend to continue. Exporters manufacturing elsewhere and competing with Chinese producers will, of course, see this in a favorable light. But most of the impact of a stronger yuan will come from translation gains on earnings in China. With so many multinationals counting on more of their earnings to come from China, a rising currency trend is truly their friend. Not only will the China-card players get the translation gains, but Chinese consumers with rising purchasing power also feeds hope that they will fuel the global economy back into the safe zone.
But not in actuality
Of course, making these earnings gains real by getting the cash out of China is another matter. A rising yuan without new convertibility leaves MNCS with excess cash in country just seeing the value of that cash in dollar terms creep up. Informal conversations between treasurers at firms throwing off cash in the middle kingdom and those at firms looking to put more money in—along the lines of a swap—are already common. The prospects of rising yuan will only increase this type of banter as firms look for creative ways to make their stronger earnings picture actual.