China Currency Reform Could Bring Mixed Results
By CHRIS CZIBORR
Orange County companies are in the middle of the tug-of-war over China’s currency.
The issue is a divisive one for OC companies, many of which have plants in China that export to other markets. They could suffer from a higher yuan. Some companies here sell to China and would benefit from a revalued Chinese currency.
Take Fullerton’s Beckman Coulter Inc. The maker of medical diagnostic products ships U.S.-made materials to its China unit, which has to sell in yuan to earn dollars to pay for the materials.
A higher yuan would yield a savings for those kinds of transactions,effectively a natural currency hedge.
“When we sell products into China, customers pay in dollars so they have to go to a Foreign Trade Commission to exchange local currency into dollars,” said Ed Ehrman, director of worldwide business planning for Beckman. “So in that respect a more expensive Chinese currency would be better for us.”
On the other hand, Beckman’s China unit exports products into other Southeast Asian markets. A higher yuan would make those shipments more costly in Southeast Asian markets.
China’s currency is a hot-button global trade issue.
For a decade now, China has fixed its currency at about 8.28 yuan to the dollar. Last week, a top Chinese official said Beijing would look at floating its currency down the road but plans to keep the yuan at its fixed rate for now.
The country is under pressure to revalue the yuan by the U.S., which argues the currency is artificially low. That helps China’s exports and hurts U.S. shipments to the country’s industrial sector and consumer market, officials argue.
Irvine computer security products maker Rainbow Technologies Inc. sees more benefits than disadvantages in a stronger yuan, according to Patrick Fevery, the company’s chief financial officer.
“The likelihood is highest that the Chinese currency (eventually) would appreciate against the dollar, which would give Rainbow higher revenues,” he said. “Our China revenues would be worth more. It also would be easier for us to sell U.S. products into China, because our customers there could better afford American products. The costs of making some of our products in China would go up slightly, but overall it would be a benefit for us.”
Only about 5% of Rainbow’s $125 million in yearly sales comes from China. But the country is among Rainbow’s fastest-growing markets. Rainbow claims an 80% market share for its products in China.
U.S. and other officials are expected to keep pressing China on currency reform. Japan’s finance minister said the issue likely will come up when Group of Seven finance officials meet in Dubai on Saturday.
Last week, a bill was introduced in the U.S. Senate that would slap an across-the-board 27.5% tariff on Chinese imports. The legislation is seen as bargaining leverage for U.S. Treasury Secretary John Snow in his talks with Beijing.
Jim Peterson, chief executive of Irvine chipmaker Microsemi Corp., said he worries about pressuring China.
“I don’t think a lot of people want China to change the currency too fast,” Peterson said. “From a global point of view, everyone wants China to succeed.”
Microsemi has a small plant in Shanghai. The company owns a 49% stake in the facility, with its Chinese partner controlling the rest.
“Our partner projects stronger growth for China if the yuan stays where it is,” Peterson said.
Many of the U.S. companies pushing for a stronger yuan are consumer products companies, according to Beckman’s Ehrman. They’re in a different boat than many OC companies, he said.
“Nike’s view of China is 2.4 billion feet,” Ehrman said. “But we’re not a Nike or a GM that sells gazillions of one model or type of product. We’re a relatively focused company with specific customers.”
Donald Straszheim, who heads up Westwood-based Straszheim Global Advisors and is a former head of the Milken Institute and former chief economist with Merrill Lynch & Co., said he believes China will have a floating currency by the 2008 Beijing Summer Olympics.
“China wants to be regarded as a full-fledged member of the global economy by then. That demands a floating currency,” he said in a recent report.
Others say it’s too early to say when exactly the yuan’s value will change.
“Within the next year or so it’s possible China would let the yuan appreciate somewhat against the dollar because of U.S. pressures,” Rainbow’s Fevery said. “Japan also would like to see the yuan appreciate. It’s likely China will yield to international pressure at some point but it’s hard to say when.”
Albert Mora, Beckman’s treasury manager, said he is skeptical China will raise the yuan or allow it to float against the dollar or a basket of major currencies.
“They may say they’re going to allow the yuan to float, but I doubt they will do it anytime soon,” Mora said. “China relies more on exports than anybody so they want to protect their exports with a cheap currency.”
Beckman and other companies use hedging to guard against currency fluctuations. The Chinese government doesn’t allow financial hedging within the country. But companies could buy foreign futures contracts for the yuan from U.S. and other banks if the currency was allowed to fluctuate.
“China’s perception of the foreign currency market is that it is a market of pirates,that hedgers manipulate the market for profit,” Mora said. “They’re sensitive to that especially following the Asian currency devaluations in the late 1990s, which they believed was spurred by currency speculators.”
Unlike most Asian economies, China does not allow anyone to exchange its currency for dollars or yen without government permission.
Mora said that companies could bypass China if they wanted to eventually hedge.
“It’s effectively the same as if you did a derivative onshore. The difference is that in offshore currency options, the profit or loss a buyer or seller incurs on a currency future is the only thing that changes hands,” Mora said. “The base amount of the yuan option would never actually change hands in an offshore option. But no one is buying any currency options because everyone expects the yuan’s value won’t change in the foreseeable future.”
Global trade suffers with an artificially low yuan, according to Anil Puri, dean of College of Business and Economics at California State University, Fullerton. It effectively places the bulk of the world economic recovery on the shoulders of U.S. consumers, he said.
“Any restrictions on currency are bad from a world trade point of view, and make the world more dependent on the U.S. for recovery,” Puri said.
But OC companies with plants in China could suffer from a more expensive yuan, Puri contends.
“A U.S. company in China that brings back products here will suffer because their goods are not going to be as profitable as before,” he said. “And a U.S. consumer will have to pay more for goods from China no matter who makes them.”
