That has left global investors baffled about the timing of a rising yuan and its implications for China's $600 billion a year global export machine. American investors stand to benefit if the yuan moves up. That's because it would sweeten the dollar value returns of yuan-denominated investments. At the same time, fears of a currency-driven economic slowdown in China have helped push down stock prices on its two domestic exchanges to six-year lows. And the Hang Seng China Enterprise Index of "H-Shares," which tracks Hong Kong-listed mainland stocks and is more accessible to global investors, is down 0.56% this year. Many investors worry about the impact on Chinese exporters that compete on price. "When it comes to picking [Chinese] stocks, there's still a lot of risk," says Mark Headley, president of San Francisco-based Matthews Asian Funds and co-manager of the Matthews China Fund (MCHFX
Given the murky accounting standards of publicly listed mainland Chinese companies, some advise avoiding these shares altogether. But investors with a high tolerance for risk might consider pure China plays listed in Hong Kong or New York. China Mobile (CHL
) is one. It boasts the biggest mainland market share in cellular phone services and is considered relatively safe from a currency adjustment since it doesn't export.EVEN TRICKIER
There's also CNOOC Ltd., a unit of China National Offshore Oil Corp. (CEO
), which is widely viewed as the most experienced and well-run Chinese oil producer. Even better, it could gain from a yuan strengthening, since oil is priced in dollars, which would make it cheaper to import. However, Merrill Lynch & Co. (MER
) cut its rating on the stock from "buy" to "neutral" on June 9 after CNOOC said it may bid for El Segundo (Calif.)-based Unocal Corp. (UCL
), citing possible strains on the company's finances and credit ratings.
Another way to play a possible revaluation is to invest in domestic retailers such as Shanghai-based Lianhua Supermarket Holdings. It stands to profit from rising consumer demand -- and the potential for lower import prices. "If you're a retail store in China, a stronger yuan could help -- as long as it's not too much of a drag on the economy," says Headley of Matthews Asian Funds.
Finding the right China stock picks is trickier now than a year or two ago when China's economy was firing on all cylinders. Now, most economists expect China to slow down from nearly 10% growth rates in 2004 to about 8.5%. A sharp rise in the yuan could slow it further. But Beijing is likely to opt for more modest currency reform, probably the creation of a currency basket including the dollar, euro, and yen. Most forecasters see a 5% or so rise in the yuan against the dollar. That would crimp margins at Chinese exporters, but hardly be a disaster for them.
Companies based elsewhere in Asia that have significant exposure to China can be a less risky way to play a possible revaluation. Among the favorites are multinationals such as Honda Motor (HMC
), which is bolstering its car-manufacturing base in southern China -- and uses lots of parts imported from Japan. A stronger yuan would also be good news for Korean shipbuilders like Hyundai Heavy Industries Co. that compete head-to-head with Chinese rivals on price.
Investing in China will remain a difficult proposition for global investors. But the picture should become a little clearer when Beijing finally bends to international pressure and frees its currency from its rigid dollar peg. By Brian Bremner and Chester Dawson