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Yuan Revaluation - Impact on US Stock Market |
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The impact will depend upon the sector and the individual company's business relationships with China. Manufacturers will rally initially on the perception that a revaluation would mean increased competitiveness for US manufacturers. The main industries that most likely gain will be the textiles, steel, furniture manufacturers and toy makers to name a few. China is the leader in those areas, by keeping the prices low, Chinese manufacturers have captured significant market share in those sectors. Companies that import heavily from China such as Wal-Mart may decline as a revaluation translates to higher costs for one of the world's biggest low cost retailers. Exporters to China on the other hand could rally as a revaluation increases the purchasing power of Chinese corporations. There will also be interesting trading for those listed on US exchanges as ADRs.
Lets take a case study look at Wal-Mart (NYSE: WMT), an importer of Chinese goods (note these are not recommendations):
As one of the world's largest low-cost retailer, Wal-Mart's biggest advantage is its high turnover of low cost products that are mainly produced in China. Currently, Wal-Mart purchases over $15 Billion in Chinese made goods, more than either Russia, Canada or Australia. Chinese made goods is what keeps Wal-Mart competitive in the mega retail business. |
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- Wal-Mart's costs of goods sold (COGS) will instantly increase in the dollar terms
- This may force Wal-Mart to increase prices, which would hurt sales. Alternatively, Wal-Mart may decide to bear the brunt of the higher cost, which is still negative for corporate profitability
- As sales drop, earnings will follow dragging the stock's price lower
Lets take a case study look at Nam Tai (NYSE: NTE), an exporter of Chinese goods (note these are not recommendations):
Nam Tai is an electronic components manufacturer that positions itself to take advantage of low-cost manufacturing in China. They believe that their history and experience allows them to take advantage of the trend of shifting production of electronic products. They seek to manufacture the highest-quality products at a low cost to their customers. Their location in China gives them access to one of the lowest cost engineering and production work forces in the world. |
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Nam Tai and the Impact of the Yuan |
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Their corporate strategy works well in the dollar-pegged environment where the cheap dollar provides a competitive advantage to manufacturers such as Nam Tai. By relying on the weak dollar, Nam Tai can underbid other manufacturers from Europe, US and Asia. This may sound like an unfair advantage, where a company may increase its sales by lowering prices while maintaining its overhead and profit margins.
When China lifts it dollar peg, Chinese exporters such as Nam Tai will experience a major shock to their low price high volume sales. The Yuan appreciation will make Chinese exporters less competitive in the global market. Nam Tai would have to compete on a more leveled playing field against the other companies, where quality and price competition will take effect. |
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