China’s reputation sure does precede itself. Canadian financial industry made it clear they are unimpressed with China’s recent decision to de-peg its currency, the renminbi or yuan, to the U.S. dollar.
Industry experts are looking at it against the backdrop of a poor track record and fickle international policy, as they point out that the announcement is vague on detail. Some are calling it a pre-emptive measure ahead of G20 summit; a ploy to avoid confrontation with the U.S. and other members of the group of 20 leading and emerging nations when they meet on June 26 and 27 in Toronto.
While admitting a stronger yuan will indeed have an impact on the Canadian market, they are urging investors to be extremely cautious and hang fire on investment decisions based merely on the news.
“Investors should keep in mind the Chinese have made this announcement ahead of the G20 summit in order to avoid a trade showdown with the United States,” says David Andrews, director, Investment Management, Richardson GMP Limited. “The announcement was vague on implementation details so we really should not expect major revaluations to take place as the Chinese are likely to let the yuan float ‘somewhat’ as opposed to ‘freely’.”
Similar sentiments are conveyed by Dagmara Fijalkowski, head of Global Fixed Income and Currencies, RBC Global Asset Management. “This move is largely symbolic in the short term,” says Fijalkowski. “The timing is critical, coming just a week ahead of the G20 (summit), and possibly allows China to avoid being named a currency manipulator by the U.S.”
Fijalkowski says while the renminbi is likely to appreciate in the longer term, it will do so very gradually, like it did between 2005 and 2008.
An appreciation in yuan affords Canadian government the opportunity to invest in more resource assets, provided China puts its money where its mouth is, says Mike Macdonald, vice president, consulting, Weigh House Investor Services.
“Chinese policy can be fickle and a slight downturn in China may see their currency strategy abandoned or weakened,” says Macdonald.
The impact of a measured flexibility, and presumably appreciation of the renminbi, could be constructive for commodity markets.
“The move gives China more purchasing power to buy commodities or goods and services from the rest of the world,” says Macdonald. “Given the focus on building China’s infrastructure the Canadian resource-based economy should see strong demand for our resources.”
The expected appreciation means increased purchasing power of the yuan, says Richard Knowles of R. Knowles & Associates Financial and Wealth Management in Vancouver. This could benefit Canadian economy as it would make Canadian exports less expensive for the Chinese buyers. “Canadian exporters of raw materials like lumber and metals would get more business and raw order sales to China in that scenario.”
An un-pegged currency may allow many things to unfold creating positive ripples across the whole Canadian economy, inject positive sentiment in the stock market and add further strength to the loonie.
While a yuan-loonie tango is only expected, some industry watchers are taking note of the role the U.S. dollar may play. “If the Canadian dollar is rising faster than the yuan (against the U.S. dollar) then it will result in potentially lower prices for goods coming from China and more expensive to export to China,” says Ken Hawkins, chief investment strategist, Weigh House Investor Services. “The opposite will happen if the Canadian dollar goes down relative to the yuan.”
However, Hawkins says it will not have major consequences for the Canadian market if the currency movements are gradual.
Assuming China keeps its promise, should a stronger yuan dictate new investment strategies to Canadian investors? Two words sum up the general reaction: Not really.
“The better question is should the investor have any assets in China as their higher currency value should help domestic consumption by making imports cheaper and relying less on exports,” says Tony De Thomasis, president, De Thomas Financial Corp. in Toronto.
The prospect of cheaper imports is unlikely to have Chinese companies going on a buying spree. That would run counter to China’s recent efforts to slow down and stop its economy overheating. Those who know that know there may not be big gains immediately, except for some ‘roll the dice’ runs in the market factoring in growth not yet there.
Portfolio pundits, therefore, are at pains to caution speculators to avoid market timing and making wholesale portfolio adjustments before the impact of the changes become evident. Patience, they say, is a valuable investment tool. Their advice is to invest in stocks that respond to the actual appreciation of the yuan rather than to the announcement of it.
“If the yuan is rising then it might make more sense to buy Chinese stocks that trade in China in yuan, than to buy the stocks of international companies that sell into the Chinese market,” says Hawkins.
By loosening control of its currency, even at its own pace, China will be lowering the barriers to free trade, a small step for foreign manufacturers, a giant leap for global economy.
“This is a generally positive event which should lower some currency risk and reduce economic tension at a macro level,” says Macdonald.
What it is not, however, is a cure-all for the current world economic troubles.
(06/23/2010)