(BLOOMBERG) – The rise in the Chinese renminbi has given equity investors a touchstone in their search for potential winners and losers.
Benchmark stock indices in Hong Kong and the mainland have been supported by the recent strength of the renminbi, as capital drives out assets denominated in a strengthening currency.
The correlation between the Chinese benchmark CSI 300 and the strength of the onshore renminbi is almost the highest in seven months, while the Hang Seng index is also the most linked to the currency’s movements since February, according to the data compiled. by Bloomberg. But not all actions are beneficial.
Likely winners include companies that can take advantage of currency dichotomies, including Chinese real estate developers with significant dollar debt and companies that generate most of the income on the mainland but are listed in Hong Kong, analysts said.
On the flip side of the monetary equation are the exporters, whose products will be less price competitive when sold in foreign markets.
The renminbi has jumped 12% against the dollar since May of last year, the rally accelerating recently amid inflationary concerns and greenback weakness. Some investors expect the renminbi’s rally to continue, although the central bank has taken a visible step to stem the gains.
“Central bank intervention will only slow the pace of appreciation, not the direction of appreciation,” said Jackson Wong, director of asset management at Amber Hill Capital. “A rising Chinese currency has historically a positive correlation with the mainland and Hong Kong benchmarks, although some sectors will suffer.”
Borrowers with debt in dollars: The companies that will benefit the most directly will be those that generate income in renminbi while borrowing in foreign currencies, as the debt is reduced.
According to Bloomberg data, about 24% of the total dollar-denominated bonds issued by all Chinese companies are from developers. China Evergrande Group and Country Garden Holdings are among the companies with the most dollar debt in China.
Chinese companies listed in Hong Kong, or H-shares: A stronger renminbi bodes well for H-shares, as well as valuations and foreign capital inflows, CICC analysts, including Wang Hanfeng, said. While some investors may fear that a strong renminbi may discourage southern inflows due to potential currency losses, historical experience suggests that such inflows are positively correlated with the currency, as a stronger renminbi generally suggests better ones. growth prospects for Chinese assets, Wang said.
The Hang Seng China Enterprises Index has lost more than 10% since its February high.
Consumer Businesses: A rising currency improves purchasing power and consumer confidence, which benefits the consumer sector, said Yang Delong, chief economist at First Seafront Fund Management.
Consumer discretionary and staples have been the worst performing sector in the CSI 300 since the February peak, according to Bloomberg data.
Labor-intensive exporters: Manufacturers such as toy makers, who rely on cheap prices to attract customers and generate most of the income overseas, could suffer a stronger renminbi hit East Asia Qianhai Securities analyst Zheng Jiawei wrote in a research report.
Foreign Asset Owners: Textile manufacturers and machinery companies will suffer because they tend to have a large proportion of assets denominated in foreign currencies, said Cliff Zhao, head of research at CCB International.