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| Feature: Eastern Promise |
Perilous Paths to China
Rebecca Fannin
09/01/2005
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Values
Revalued
 Those looking to invest in China should consider how a
revaluation of the
yuan—also known as the renminbi or
“people’s
currency”—would affect returns.
(The official
listing for the currency
is CNY, although RMB also is correct.)
One sector likely to be an
instant—albeit
short-lived—beneficiary is the flashy,
but capricious,
property market. The prospect of a stronger renminbi has created
a
veritable feeding frenzy for swanky Shanghai apartments in
developments with
Manhattan-sounding names such as Sohu and Century
Park.
The
prices of luxury
residences in Shanghai have
risen by as much as 40
percent in each of the past
three
years. They stabilized briefly this
year after the government, seeking
to
contain speculation before the
market imploded, placed
capital gains taxes of
5.5 percent on property
held less than
one year. It also boosted the requirement
for down
payments
from 10 to 30 percent of purchase price. These measures might
be able to temper the short-term gains of a stronger
renminbi.
Currency
specialists predict that
Beijing could
revalue the renminbi within the next two
years.
David Gilmore, a
partner at Foreign Exchange Analytics in Essex, Conn.,
believes the
first step would be giving the renminbi a new
exchange rate, but
one
that is still pegged to the dollar, or
perhaps even the yen or euro. It is
likely to be years, he says, before
the renminbi is available as a
freely traded
play in the
currency markets. “That is a political move
and will happen when it
happens,” Gilmore says. Even a slightly
stronger renminbi,
though, would make
Chinese exports pricier and
thereby change
the dynamics that support the
economic boom. However,
the best
Chinese companies realized years ago that the
weak-renminbi,
export-led business model would not last, and have moved to
provide
products that have more added value.
Rebecca Fannin is a New York–based freelance writer who writes frequently
about Asia and the global private equity industry.
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