June 25, 2010 6:59 pm

Investors applaud China's currency move

C hina’s move to stop pegging its currency to the US dollar is being applauded by investors across the globe, who hope that a rise in the currency’s value will boost the competitiveness of western companies.

In an apparent concession to the US ahead of this weekend’s Group of 20 (G20) meeting, officials in Beijing said they would allow the renminbi (rmb) to resume its appreciation against a basket of currencies. It had been pegged to the US dollar since 2008.

If the value of the rmb rises steadily from this point on, economists forecast that the cost of Chinese goods will jump, making goods from European, US, Japanese and Korean companies easier to sell.

At the same time, the purchasing power of Chinese wage earners would also increase – benefiting both exporters to China and Chinese companies focused on domestic consumption.

Chinese companies stand to benefit from the change as the price of their exports would rise and their purchasing power would increase.

“The strengthening exchange rate could also turn the Chinese into major global corporate acquisition merchants,” says Mike Lenhoff, chief strategist with the brokers Brewin Dolphin.

“This is a massive positive for US, European and UK equities – and other places in Asia will become more competitive as well,” adds Ben Yearsley, an investment manager with independent advisers Hargreaves Lansdown.

The sudden timing of Beijing’s decision surprised some fund managers, but they agreed it was shrewd.

“This is a smart move by China ahead of the G20 conference in Toronto at the weekend where it would have undoubtedly come under more concerted pressure to revalue the renminbi,” said Ted Scott, director of strategy with F&C Asset Management, in his latest note to investors.

“By pre-empting the summit, China has spiked the guns of its economic rivals while at the same time conceding very little.”

But while Beijing’s decision offers some benefits to European and US companies, financial advisers are still eager to recommend pan-Asian and China-only funds.

Mainland Chinese stock markets were trading slightly higher this week on the news. The Shanghai stock exchange is up 2.16 per cent (in US dollar terms) in the past week and the Hang Seng gained more than 2 per cent.

“The economic growth in the world is clearly moving ever more toward the east,” says Tim Cockerill, head of research with the UK advisory firm Ashcourt Rowan Asset Management.

Philip Ehrmann, manager of Jupiter’s China fund, is so impressed by China’s economic growth projections that he predicts the country will eclipse Japan as the world’s second-
largest economy before the year ends. “Multi-nationals are making good money in China and it still looks fair value,” says Ehrmann. “The stock market in China has gone sideways since last July. Stocks’ price-to-earnings ratios have come down considerably.”

In the past five years, however, the average UK-registered Asia Pacific (excluding Japan) fund gained 101 per cent, according to Morningstar, while the average performance of China and greater China funds was even higher at 164 per cent.

Two funds Cockerill recommends are First State Asia Pacific Leaders, which takes a long-term view on stock selection, and Fidelity’s South East Asia fund, which has a more active mandate and more than 30 per cent in China. The First State fund rose 139 per cent in the past five years, while Fidelity’s South East Asia fund is up 168 per cent over the same period.

Some advisers have suggested that private investors could also consider betting on the rmb’s performance in currency markets.

Just this week, ETF Securities, the exchange-traded fund (ETF) provider, introduced two new emerging markets currency ETFs offering long and short exposure to the rmb.

There are drawbacks to the revaluation, however. First, Chinese exports are set to become more expensive, which is a concern for investors in US and European retailers selling Chinese goods. Second, currency speculators might be attracted to buy the currency for short-term gains. In response to such a stampede of interest, inflation might increase and Beijing could face difficulty controlling the country’s money supply, forecasts Scott.

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