Stronger yuan? No problem, say Asia tech exporters

By Kelvin Soh – Analysis

TAIPEI (BestGrowthStock) – Asia’s legion of technology exporters may not struggle, as some predict, if China allows its currency to appreciate.

A stronger yuan would rather boost consumer spending power and increase the value of Chinese assets.

The conceived wisdom has been that the Taiwanese, Singaporean and other makers who piece together most of world’s popular gadgets in Chinese factories will be hurt by a stronger yuan, which would raise operating costs and squeeze margins that are often already in the low single digits.

However, most manufacturers survived a 19 percent rise in the yuan between 2005-08 and use hedging tools and dollar borrowing to mitigate risk.

Patrick Bennett, strategist at Standard Bank in Hong Kong, doesn’t see a yuan rise as a total game-changer.

“You’re giving the Chinese consumer more spending power, and most of these tech exporters have foreign exchange tools to deal with any appreciation,” he said.

China has been under pressure from major trading partners such as the United States to allow a more flexible yuan, and many economists expect the currency to be revalued by 3-5 percent by the year-end.

Many of Asia’s tech exporters including Hon Hai Precision Industry Co Ltd, Flextronics International Ltd and Quanta Computer Inc run huge facilities in China, making and assembling electronics gadgets for leading brands such as Hewlett-Packard Co and Apple Inc (Read more about Apple stock future.), freeing them up to concentrate on marketing and development.

Most tech firms spend their yuan on wages and related costs, but these make up less than 5 percent of a PC maker’s overall costs, UBS analyst Edward Yen said recently.

“It’s not going to have much of an effect,” Gary Lu, chief financial officer at Compal Electronics Inc, the world’s No.1 contract laptop PC maker, said at the Computex computer show.

“We bill and source for everything in U.S. dollars, so besides some very local costs such as wages, we won’t see a hike in actual costs.”

Many companies also have assets in China such as production facilities and yuan cash holdings, which would be worth more with any local currency appreciation.

Foxconn International Holdings Ltd, the world’s largest contract mobile phone maker, had more than $1.7 billion worth of property and equipment in China at the end of last year.

“Many of these companies already have a natural hedge, and some might even come out in a net positive position if the yuan appreciates,” said Jenny Lai, a Taipei-based analyst with CLSA.

“They also have large cash holdings in yuan sitting in Chinese bank accounts, and any subsequent hike in costs from a currency revaluation will be offset by all that cash.”

Beijing has said it wants to promote private consumption to re-orient its economy away from a model that relies heavily on foreign investment and exports — and a currency revaluation would fit into this policy.

“Chinese consumption is still a big growth story,” said Bonnie Chang, an analyst at Yuanta Securities. “A stronger yuan will have consumers spending more, which will be good for business.”

Twelve-month yuan NDFs were trading at 6.75 yuan to the U.S. dollar on Thursday, implying that investors expect the currency to appreciate about 2 percent over current levels.

Another defense that companies have up their sleeve is borrowing in dollars. The amount they would have to repay in yuan terms would fall if the Chinese currency appreciates.

The world’s top webcam and keyboard manufacturer, Chicony Electronics Co Ltd, had more than $100 million in dollar-denominated debt at the end of its last reporting quarter, said its chief financial officer, Molly Lin.

“Everyone already knows it’s going to happen, so we’ve already made plans and may even come out positive,” Lin said. “When the yuan was still weak, we used it to borrow lots of U.S. dollars so that we repay less when it appreciates.”

A bigger worry could be copycat appreciations by smaller economies such as Taiwan, Singapore and South Korea as they try to make imports cheaper and help domestic consumption.

The Taiwan dollar and South Korean won both appreciated by around a tenth in 2005-08 when China allowed its currency to rise, while the Singapore dollar gained almost a fifth.

“All the Asian economies are very closely linked,” said Standard Bank’s Bennett. “If you have one major trading partner moving on its currency, the rest are not going to be sitting around watching.”

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(Editing by Anshuman Daga)

Stronger yuan? No problem, say Asia tech exporters