New
Debutante at the Ball:
Does Yuan Revaluation Mark Formal
Coming-Out of Asian Consumer?
By Keith W. Rabin
KWR International, Inc.
Aug 4, 2005
Many analysts evaluating the
Chinese Yuan revaluation are focusing on the fact a 2.1% band
is unlikely to raise the relative competitiveness of U.S. manufactured
goods. Others question its impact on U.S. consumer spending.
The subsequent "solemn declaration" by the People's
Bank of China (PBC) that this change "does not mean this
adjustment is a first step " has only reinforced the prevailing
skepticism.
This view misses the point.
Irrespective of any announcements by the PBC - who are obliged
to cool down speculative sentiment to prevent large inflows of
hot capital -- it should be clear this marks a major step in
a long-term adjustment process. Former U.S. Undersecretary of
the Treasury for International Affairs John Taylor characterized
it in a recent Bloomberg radio interview as being similar in
importance to the U.S. abandoning the Bretton Woods system when
gold backing was removed from the dollar in 1971.
Even if one is relatively bullish
on the U.S., it is hard to dispute it is a relatively mature
and over-serviced economy. Consumers are highly indebted -- and
most of the easy gains from corporate rationalization have been
realized. There is far more growth in economies that are just
beginning to realize their potential. For example, it has been
estimated only 5% of the Chinese population has flown on a plane
and there are less than 200 airports in China compared to 10,000+
in the U.S. Which market has the greater potential for increases
in aviation services moving forward?
In India, consumer finance
leader ICICI bank issued about 100,000 new credit card customers
every month during 2004. Total card usage in the country doubled
from 4.3 to 9 million over the previous four years. One might
wonder if this is sustainable - until one realizes India has
a total population of 1.1 billion. Only 53 million - less than
5% -- are estimated to be mobile phone subscribers. Indonesia's
mobile telephone market is also growing rapidly - at a 70%+ compounded
annual growth rate over the last six years - yet still has one
of the lowest penetration rates in the region. Similar and perhaps
even more extreme statistics can be found for automobiles, appliances,
mortgages, luxury goods and most other consumption measures.
Even more mature markets such as Japan and Korea have been showing
signs of more robust consumption in recent months.
The simple fact is the U.S.
cannot indefinitely sustain dramatically higher wage scales and
cost structures than developing countries without further enhancing
its competitive advantage. That will not be easy. One recent
McKinsey Global Institute report goes so far as to predict in
some industries a quarter to half of all jobs are likely to move
offshore from mature economies. Neither can the U.S. maintain
its role as the primary engine of world growth through a debt-financed
consumer binge and dramatic inflation of housing values. The
necessary correction may not be imminent and indeed many extremely
bright investment managers have underperformed in recent years
as they try to pick the top. Nevertheless, Paul Volcker, Julian
Robertson, Warren Buffet and Peter Peterson are just a few of
the many wise people who have gone on record as fearing the potentially
severe consequences that may accompany the adjustment that needs
to unfold.
Increased consumption in Asia
- both consumer and industrial - is vital to the global economy.
This trend, however, is in its infancy and in no way can Asia
at present - be deemed a substitute for demand in the U.S. and
Western Europe. Nor is it independent of strong correlation with
movements on Wall Street. Yet the removal of the Yuan-Dollar
peg is one less obstacle in the structural movement now headed
in that direction.
This need not, however, be
something to fear. Major business and investment opportunities
are arising as Asia develops. In comparison, growth in the U.S.
and Western Europe will be relatively stagnant. Given the leadership
role U.S. firms continue to demonstrate in the development of
intellectual property and technological applications, as well
as products, content, branding, distribution and financial management
-- there is no reason they cannot command a sizable share to
bolster top line growth and profitability. This is true irrespective
of whether they control and undertake the actual manufacturing.
(For an insightful analysis on the relationship between intellectual
property, branding/distribution and manufacturing and the profit
margins that result, please see C.H. Kwan's "China
Grows but Wealth Remains Elusive" in the Sept. 2002
KWR International Advisor.
It is also important to recognize
both the role that Asian Central Banks have played in financing
U.S. consumption as well as the ramifications that efforts to
lift Asian demand will bring on their appetite for U.S. Treasury
holdings. Nobel prize winner Joseph Stiglitz highlighted what
he termed the "myth of mutual dependence" which underlies
this relationship in a recent Financial Times column asking "If
its government is to lend money, why not finance its own development?
Why not fund increased consumption at home, rather than that
of the richest country in the world?" While a move away
from U.S. treasury securities is not imminent, that does not
mean this will always be so.
The Yuan revaluation makes
imports less expensive - not only in China - but in other Asian
economies now more able to let their own currencies appreciate
as well. For the moment the change is small. However, even if
China's primary motivation was to alleviate political heat and
no further steps are envisioned, the genie is out of the bottle.
Market forces and diplomatic pressure are likely to force additional
movement. Just as every quarter point rise by the Fed is largely
insignificant by itself, each builds in impact over time.
Forward-looking investors can
use this growth to diversify and energize portfolio returns -
supplementing their U.S. and European businesses and holdings.
Simon Property Group, for example, one of the largest U.S. real
estate and shopping mall developers, announced last month a partnership
to develop about one dozen shopping centers in China. Wal-Mart
- which will have as many as 60 outlets on the mainland by yearend
- will place an anchor in each center. Some will include cinemas
operated by a unit of Time Warner.
Financial investors - retail
as well as institutional - who recognize these developments are
beginning to benefit as well. Interestingly, their focus is not
on exporters, who have been the most widely owned Asian equities
by foreign investors in the past -- but on those that have a
domestic focus. In addition to commodity plays such as BHP Billiton
(BHP) or Rio Tinto (RTP), and numerous ETF's and mutual funds,
examples of U.S. listings include ICICI Bank (IBN) and VSNL Telecom
(VSL) in India, iShares FTSE/Xinhua China 25 Index (FXI), Petrochina
(PTR) and China Telecom (CHA) in China, Telekom Indonesia (TLK),
Kookmin Bank (KB), Hanaro Telecom (HANA) and Korea Electric Power
(KEP) in Korea and NTT DoCoMo (NTT), Orix (IX), Mitsubishi Tokyo
Financial Group (MTF) and Nissin (NIS) in Japan. Those willing
to look at bulletin board listings have even more options. A
few interesting candidates include Bumrungrad Hospital (BUHPF),
Noble Group (NOBGF) and Jollibee Foods (JBFCF).
It is entirely possible --
or even probable -- that along the way China and other Asian
economies will falter in their efforts to manage this transition.
This will lead to increased volatility, possibly the much-feared
"hard landing" in China, and numerous other economic,
financial, social and political pressures that exert themselves
in ugly fashion. Similarly, the potential for financial crises
in the U.S. should not be underestimated.
The bottom line, however, is
irrespective of the potential for traumatic volatility along
the way, over time Asia and other emerging economies - as well
as restructuring stories such as Japan - will rise in importance
when measured in terms of total demand and market capitalization
in comparison with the U.S. and Western Europe. The Yuan revaluation
marks a perhaps small - but significant -- step in this evolution.
As Asia increasingly exerts
itself as an independent consumer and industrial market, both
portfolio and direct investors need to incorporate this development
into their thinking. This will include close monitoring and planning,
as well as financial positions and business ventures that can
take advantage of the opportunities now beginning to unfold.
Keith Rabin
President: KWR International,
Inc.
email: kwrintl@kwrintl.com
website:
http://www.kwrintl.com
Keith W. Rabin serves
as president of KWR International, Inc. (KWR) and publisher of
the KWR International Advisor newsletter. KWR is a consulting
firm specializing in the delivery of research, communications
and advisory services with a particular emphasis on business
development, economic/political analysis, public and investor
relations, financial transactions, corporate and marketing programs.
Our clients include governments, associations, venture companies
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While the information
and opinions contained within have been compiled from sources
believed to be reliable, KWR does not represent that it is accurate
or complete and it should be relied on as such. Accordingly,
nothing in this article shall be construed as offering a guarantee
of the accuracy or completeness of the information contained
herein, or as an offer or solicitation with respect to the purchase
or sale of any security. All opinions and estimates are subject
to change without notice. KWR staff, consultants and contributors
to the KWR International Advisor may at any time have a long
or short position in any security or option mentioned.
© 2005 KWR International,
Inc.
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