BT : Property players may gain from yuan push

Business Times - 23 Jun 2010

Property players may gain from yuan push

But commodity markets are unlikely to join the ride, say analysts

By JAMIE LEE

(SINGAPORE) Property developers in Singapore and Asia could benefit if China nudges its currency up, as Chinese consumers snap up real estate overseas with a stronger yuan in hand.

But there is less positive reading on the commodities market - which reacted to China's currency reform with a sharp price jump - as analysts note that an appreciation of the yuan might not boost demand for commodity imports ahead.

Over the weekend, China said that it would make the currency more flexible by getting rid of its 23-month peg to the US dollar, though it firmly ruled out a one-off revaluation.

But the knee-jerk reaction seen on Asian markets on Monday gave way to a region-wide sell-off yesterday, as temporary amnesia over Europe's debt problems vanished overnight.

The Hang Seng Index dipped 0.45 per cent, the Straits Times Index lost 0.46 per cent, the Nikkei 225 slid 1.2 per cent, and the Shanghai Composite gained just 0.1 per cent.

Analysts were not surprised by the latest reform on the yuan, saying that the move could help to curb a build-up in the asset bubble, and are now expecting a mild yuan appreciation in the second-half of the year.

DBS economists expect the currency to appreciate by as much as 2 per cent this year, on the back of an uncertain global economic outlook and debt issues surrounding the eurozone.

Singapore property firms such as CapitaLand - which has about 35 per cent of its revised net asset value coming from China - should gain from a revaluation of China assets and stronger Chinese interest in properties here, said a Citi Investment Research note.

DMG & Partners Securities also noted that property developers such as SC Global and Wing Tai would win from greater demand in high-end properties.

Some analysts have also turned sanguine on commodity plays on hopes that a stronger yuan would lift demand for resources.

'Commodity prices were strongly correlated with the last yuan appreciation episode in 2005- 2008,' said Citi, which sieved out Singapore listings Golden Agri Resources and Indofood Agri Resources as its top picks for the region.

But HSBC's China economist Qu Hongbin said in a report that since this currency reform was pitched at resuming flexibility, there will be no 'meaningful impact' on Chinese demand for commodities.

An RBS report also noted that a modest increase in the purchasing power of the yuan is unlikely to cause a sharp rise in Chinese commodity imports.

'Most hard commodities have traded in a more than 20 per cent range in the past few weeks and intra-day moves for the exchange traded commodities of 3-5 per cent,' the RBS report yesterday said.

'Against an uncertain macro backdrop, we believe it is unlikely that modest and gradual yuan revaluation would provide the catalyst for significant commodity price gains in 2010.'

Other beneficiaries include Chinese banks. Morgan Stanley raised its positions in ICBC and Bank of China to overweight the banking sector, on hopes that a less aggressive stance in tightening measures in China should prompt better loans growth over the next six months.

The impact on Singapore equities is mixed, since some companies here may only benefit from the forex translation, and not operational gain, Yeo Kee Yan, vice-president of DBS Vickers Group Research, told BT.

Because S-chips such as Midas Holdings and China Animal Healthcare have all its revenue exposure in yuan, their net profit should improve by as much as the extent of yuan strengthening, DBS said.

But companies such as Broadway Industrial and Yangzijiang Shipbuilding could see a negative impact, said DMG's report.

Broadway's accounts receivables are mostly denominated in the US dollar, which means the company could see higher staff costs. This currently accounts for up to 20 per cent of its cost of goods sold.

As for Yangzijiang, there could be marginal impact from a stronger yuan against the US dollar because its contract revenue is set in US dollars.

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Well in hand: CapitaLand - which has about 35 per cent of its revised net asset value coming from China - should gain from a revaluation of China assets and stronger Chinese interest in properties here