The People’s Bank of China (PBOC) has aggressively weakened its currency over the past few years to make its exports more competitive. While this has helped the nation produce high economic growth rates, its currency devaluation brought criticism to the PBOC. The cost of this was that China and its yuan were not considered on the same level for the purposes of international financing as other established global currencies, such as the U.S. dollar and the euro.
However, in a landmark announcement, this is about to change. As various financial media outlets reported, the Chinese yuan was approved by the International Monetary Fund as a global reserve currency. This cements the yuan as a main world currency and is a vital step in establishing the Chinese economy as a global power. There are only four other currencies—the U.S. dollar, the pound, the yen, and the euro—that share this elite status.
Dividend.com discusses why this revelation is both important and positive news for the Chinese economy, as well as some U.S. stocks that should benefit in the years ahead.
Implications for the Chinese Economy
Generally speaking, this is viewed as a long-term positive for the Chinese currency, and by extension, its economy. After a prolonged downturn in the Chinese yuan this year due to monetary easing measures employed by the nation’s central bank, the Chinese currency has rallied against the U.S. dollar in recent weeks in anticipation of this move. Going forward, China will have to give up the tight control it has had over its currency in recent years—it has taken aggressive steps to weaken its currency in the past few years and will need to curb those efforts. This means the yuan could rise significantly against other currencies.
The IMF’s special drawing rights will now have to make room for the Chinese currency.
The euro will be the biggest loser among the major currencies, as its allocation within the XDR will be reduced the most significantly—previously, the euro held 37.4% of the XDR. The U.S. dollar will hold fairly steady, even after inclusion of the Chinese yuan. The allocation toward the U.S. dollar will be reduced only from 41.9% to 41.7%. Over the past several years, the U.S. dollar has held up in relation to the XDR, which reinforces the view that the U.S. dollar is still the premier global currency.
Historically, a strong currency has been associated with a strong economy, and this is what the IMF forecasts for China in the years ahead. Read the following statement by IMF President Christine Lagarde in the aftermath of the announcement: “The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”
As a major emerging nation with a booming middle class, China is experiencing an increasing level of economic activity driven by consumer spending. Therefore, a stronger Chinese currency–which is good for the Chinese economy–should naturally flow through to be a positive for the Chinese consumer as well.
These U.S. Stocks May Benefit
Apple, Inc. (AAPL ) has one of the biggest businesses of any U.S. company. Apple has experienced rapid growth in China in the past few years, due largely to its recent partnership formed with China Mobile—the largest wireless carrier in the world with more than 750 million customers. This has opened up Chinese consumers to Apple’s devices and product ecosystem, and the results have been outstanding. Apple’s revenue in China grew 84% in fiscal 2015, to more than $58 billion. Since 2013, Apple’s sales in China have more than doubled.
Qualcomm, Inc. (QCOM ) is highly dependent on China because it generates a very high percentage of its revenue there. Qualcomm has not only focused its own business in China, but it also owns a stake in privately-owned Chinese device manufacturer Xiaomi. Last year, 53% of Qualcomm’s revenue was generated from customers and licensees based in China. That percentage was up from 50% last year, and 49% the year before that.
Lastly, food and beverage companies stand to benefit from a stronger Chinese economy and consumer. One U.S. company that has aggressively targeted China is Yum! Brands (YUM ), which operates the Taco Bell, Pizza Hut, and KFC fast food chains. China itself makes up more than half of Yum’s operating profit. Yum in particular has struggled from the economic slowdown in China over the past year. Yum’s same-restaurant sales, which measures sales at locations open at least one year, grew just 2% last quarter in China. Analysts had expected 9% same-restaurant sales growth in China for the quarter.