Posts Tagged ‘Procter & Gamble Co’

YUAN …. “KNEE-JERK REACTION”

The Chinese New Year has only just started, and already trade tensions are ratcheting up. The strength of China’s Yuan gave the world a confidence to end the peg & acted as a cushion for reviving from the fears of the global financial crisis, especially with European debt worries in the background.

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China’s yuan soared at 6.7980, its highest level against the US dollar since its July 2005 revaluation after the central bank signaled it would allow the yuan to continue its rise.

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REVALUATION OR REVOLUTION???

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The yuan policy change signaled that the Chinese economy “the world’s third-biggest economy” is on a more solid footing. China has been under intense global pressure, especially from the US, to introduce more flexibility between the yuan and the dollar to encourage the cash-rich Chinese to buy more from the heavily indebted West.

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Needless to say, a stronger yuan would allow China to lower the cost of its imports, particularly commodities.

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Even a small rise in the yuan could shave billions off the cost while raising the volume of China’s commodity purchases. China’s economy is still in a cycle towards overheating.

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China’s inflation accelerated in May to 3.1%, the quickest pace in 19 months, highlighting overheating risks in the fastest-growing major economy. Inflationary pressures may convince China to allow its currency to appreciate. A stronger yuan is in China’s interest to satisfy its appetite for resources.

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Yuan appreciation should benefit China’s importers of bulk commodities like soybeans, cotton, copper and various mining products including iron ore and other metal ores as these commodities, priced in the dollar, will be cheaper. The appreciation will support commodities prices in dollar terms in global markets as China will be able to accept higher prices in the dollar terms.

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Following is a list of some likely winners and losers from any yuan appreciation.

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WINNERS

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·Foreign resource companies – On hopes China’s move would increase its resource imports.

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·Foreign heavy machinery makers – The U.S. sells billions of dollars worth of machinery and products to China each year.

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·Foreign automakers – Foreign automakers that sell cars in the world’s largest vehicle market, should also gain.

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·U.S. companies such as General Electric Co and Procter & Gamble Co are likely to make currency exchange gains when their China profits are converted into U.S.dollars.

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·Chinese airlines – China’s three top carriers, Air China China Eastern Airlines and China Southern which borrow in foreign currencies to pay for aircraft, but generate reveyuan, could benefit the most. Airlines also use dollars to buy fuel.

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·Foreign luxury firms – A firmer yuan would likely boost other Asian currencies as a strong yuan is seen by investors as a pledge of confidence for Asia’s growth. That should help luxury goods makers, whose imported products will be cheaper across the region, just as more Asians benefit from increased wealth.

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LOSERS

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·Foreign retailers- Companies signed earlier memorandum of understanding for projects to build, would have to spend more in U.S. dollars to fund investments.

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·Chinese commodity firms – Companies with dollar-linked prices for their output, but their costs are in yuan, would find their revenues falling while their costs remain steady, if yuan strengthens.

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In a nut shell, China is not shying away from commodity consumption any time soon.They still have roads to pave, factories to build, and cities to expand. China is thinking ahead in terms of commodity demand. The shift toward a stronger exchange rate may give more purchasing power to its people. Chinese consumers might buy more while their counterparts in the U.S. may have to pay more & cut back on their spending as the cost of goods imported into America rises. This move is a net plus for the world economy.

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