Weaker yuan would be no panacea for China Inc

SOHO China

14/01/2016 03:07

(The author is a Reuters Breakingviews columnist. The opinions 
expressed are her own.) 
    By Rachel Morarjee 
    BEIJING, Jan 14 (Reuters Breakingviews) - A lower yuan would 
be no panacea for China Inc. The currency's recent drop against 
the dollar has renewed fears that China could use foreign 
exchange rates to get a competitive edge over rivals, perhaps 
even resorting to a sharp devaluation. That would yield some 
winners and losers. But it would do little overall for the real 
economy. Besides, exports matter less than they used to for 
Chinese growth. 
    To be sure, some companies would cheer. Equipment makers and 
shipping firms that bill their customers in dollars would 
benefit especially. For example, a 15 percent slide in the yuan 
would lift operating income 38 percent at China Machinery 
Engineering  1829.HK  and 23 percent at COSCO  1919.HK , Morgan 
Stanley analysts estimated in August.   
    But even most exporters would not enjoy a clear-cut win. For 
many the benefits would be offset by having to pay more for 
commodities and components. After all, the strong yuan has made 
it cheaper to buy inputs such as computer chips from Japan.   
    Airlines, who buy fuel and aircraft in dollars and sell 
tickets in renminbi, would suffer. Other losers would include 
any companies with lots of interest to pay on foreign debt, like 
property developers such as Soho China  0410.HK . Broadly 
though, the impact on most listed companies would be limited, 
since both revenues and costs are largely in yuan. It would be a 
similar story for China's unlisted companies. 
    China's recent growth has depended more on building tower 
blocks, highways, airports and so on than on selling to the rest 
of the world. Exports were 36 percent of GDP in 2006 but just 23 
percent by 2014, World Bank data shows. 
    That doesn't mean Beijing's planners would not like an even 
weaker currency. But the main advantage would be to preserve the 
ability to cut interest rates, rather than boost sluggish 
exports. China's highly indebted corporations have seen real 
interest rates rise as prices have been pushed down by 
overcapacity. A lower yuan would give the People's Bank of China 
more room to come to their aid. 
     
    On Twitter https://twitter.com/morarjee.  
 
     
    CONTEXT NEWS 
    - The Chinese yuan weakened on Jan. 14, despite a firmer 
midpoint setting by the country's central bank. The People's 
Bank of China set the midpoint rate at 6.5616 per dollar prior 
to market open, versus the previous day's close of 6.5743. By 
1040 Beijing time (0240 GMT) the onshore yuan was trading at 
6.5878. 
    - China's currency has fallen more than 5 percent against 
the dollar since August. A widening gap between the offshore and 
onshore rates indicated market expectations that the yuan would 
depreciate further, before the PBOC stepped into the Hong Kong 
market to support the currency on Jan. 12.  
    - Accelerating capital flight has also fuelled expectations 
among analysts that China will be forced to further depreciate 
the yuan. Although the currency has weakened against the dollar, 
Beijing says it has remained stable against a trade-weighted 
basket of currencies.  
    - Reuters: China Dec. exports, imports fall much less than 
expected after yuan slides  urn:newsml:reuters.com:*:nL3N14X1P2 
    - World Bank data: http://bit.ly/1RmytW2 
  
    RELATED COLUMN 
    Cry-BOR  urn:newsml:reuters.com:*:nL3N14X1X5 
  
         
       - For previous columns by the author, Reuters customers 
can click on  MORARJEE/   
     
      
 
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 (Editing by Quentin Webb and Katrina Hamlin) 
 ((rachel.morarjee@thomsonreuters.com;)(Reuters Messaging: 
rachel.morarjee.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA ECONOMY/TRADE BREAKINGVIEWS