By Perry Wu
Various rumors of the CNY's impending appreciation have been running rampant the last couple of years, yet nothing has happened. However, in the last month these rumors have become more concrete. Hong Kong and overseas newspapers now quote top Chinese officials as saying the CNY's trading range might be loosened (which almost certainly means appreciating) during the next three to six months. And as the U.S. dollar continues to go further down the toilet, the likelihood of the CNY's impending appreciation only becomes stronger.
The question then for Chinese tech investors: what is the effect on Chinese technology investments?
The listed companies–Sina, Sohu, China Netcom, Kongzhong and the like–all have done IPOs denominated in U.S. dollars. Appreciating the CNY therefore decreases the U.S. dollar purchasing power of the IPO dollars that these companies have not managed to spend. Will that encourage these companies to spend their dollars faster before the appreciation? Probably not: the companies probably don't need any further encouragement. It is also possible that some of these companies, seeing the writing on the wall, have already traded their U.S. dollars for Euros and other currencies. One China Internet media executive told me last week that his company is making sure to sign all offshore contracts for 2005 in Euros, instead of the greenback they have relied on for the last seven years.
Operationally, the appreciation is positive because all the listed Chinese technology and Internet companies do their business in China and virtually nowhere else (with the possible exception of Chinadotcom). So to the extent these companies make any money, it will translate into more U.S. dollar earnings.
However, from a foreign direct investment standpoint, this appreciation may not be so favorable. Lately, American investors have gotten more directly involved in investing in Chinese tech. Barry Diller's recent foray into online travel and Amazon's acquisition of a Chinese online bookseller are two very recent examples. If American currency suddenly becomes devalued in China (as it is nearly everywhere else, these days), then more intelligent American investors may lose their direct investing appetite.
Overseas-listed Chinese companies, by definition not foreign direct investment, may still be affected by any decrease in foreign direct investment. A decrease in FDI in China could easily spill over into all other forms of investment, such as listed stocks.
There are always, of course, risks that appreciating the CNY could destabilize the Chinese economy, affecting technology as well as everything else. That is precisely why hyper-aware Chinese officials are sliding so gingerly into an eventual CNY appreciation. But that is nothing new for investors. China's risk as a country is something investors must already (or should) be taking into account.
Overall, the appreciation of the CNY will probably not be much in percentage terms. Two to five percent is the figure that is being quoted. And it is hard to imagine the brave tech investors who now buy these Chinese tech companies, at outsized multiples, will be much deterred.
About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.