We think that the renminbi should and will likely resume its gradual appreciation from the second quarter of next year.
There are three reasons for this. Firstly, by the second quarter of 2010, year-on-year export growth will reach 15% to 20%, more than enough to eliminate the previous policy concern on unemployment due to the export slump.
Secondly, emerging market economies will likely join the G3 to begin their complaints about renminbi depreciation against their currencies. Over the past seven months, the renminbi has depreciated 10% to 30% against major emerging market currencies.
As China is keen to keep its image as a responsible nation, pressures from these countries are likely to be constructive in influencing China’s exchange rate policy.
Lastly, by the first half of next year, China will begin to feel some imported inflation, especially on oil. Renminbi appreciation can help to offset part of this imported inflation.
Our analysts have studied the impact of renminbi appreciation on major listed companies’ average 2010 earnings impact, assuming renminbi appreciation of 3%, relative to the scenario of no renminbi appreciation.
For airlines, the benefit comes from the sharp reduction of debt service costs on external debt; for steel and paper sectors, renminbi appreciation reduces their import bills (e.g., on iron ore and pulp/recycled papers).
As for the victims, electronics and textile/apparels would suffer from currency translation losses because of the lower renminbi value of their export proceeds, while oil and non-ferrous producers would see their renminbi value of revenue (priced in US dollars) falling.