MoneyNews
Thursday, July 21, 2005

1. China Currency Shift Shocker
2. Telcos Answer the Bell – But Is It Too Late? 

1. China Currency Shift Shocker

Just when nobody was paying attention, the Chinese central bank has suddenly shifted its thinking on the value of its currency, the renminbi.

The peg has been in place for a decade and when it began, China was a much less important economic force. But recent pressure on Chinese officials comes at a time when the "Made in China" tag seems to appear just about everywhere.

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In a two-step maneuver, the People's Bank of China has moved away from steadying the value of its currency against the U.S. dollar and instead shifted to a basket of currencies.

U.S. authorities described the move as an "encouraging step." 

At the same time, it allowed the yuan to rise by around 2%. For some time, China has been under heavy political pressure to level the playing field since their artificially low currency has provided them with a booming export industry to the rest of the world.

The move has several implications.

First, the pressure on Chinese clearly caused them to buckle – and this begs a major question: Has recent hostility toward Chinese takeover attempts (including Unocal Corp.) prompted a rethink by China's government?

Second, the impact on the Chinese export industry won't go unnoticed. A stronger renminbi makes Chinese goods less competitive abroad. One recent report predicted that a strengthening in the renminbi would set off profit declines across various industries.

For example, the cotton sector could face a profit decline of 24%, the wool sector could face an 16% drop and other garment categories could lose profits of 26%.

However, the small 2% revaluation of the currency makes analysts wonder whether this is merely a token. Some experts had predicted that the move might be as large as 10% and in any event would be progressive. Focus will now shift to the next step and when it will occur.

The impact on larger corporations will be less evident.

The move set off a wave of reaction in Asian trading, where the major beneficiary was the Japanese yen. The prevailing news is that other Asian nations will now allow their own currencies to rise.

In similar moves, the Malaysian authorities abandoned their currency peg and Singapore officials were scheduled to make an announcement as well. The Singapore dollar is pegged to the U.S. dollar, and the move may prompt that country to peg to a basket of other currencies – just like the Chinese.

Historically, Asian banks have bought up the greenback in an effort to hold down the value of their own currencies. Today's move brings into question whether the dollar will wither against Asian currencies.

Asian central banks hold vast amounts of U.S. Treasury bonds. Prices of those bonds fell in response to the announcement, based on the view that those banks will need to buy less bonds going forward.

But again, the big winner is the Japanese yen, which rose against most currencies after the announcement.

Goldman Sachs currency expert Jim O'Neill said that the China shift "makes the yen more attractive to many people – including me."

He predicts a 10% rise in the value of the Japanese currency against the dollar over the course of the next year. And the series of revaluations in neighboring Asian nations also makes Japanese goods more attractive.

With current strong export growth accounting for one-third of Japanese growth, it's clear that this move may spark further Asian growth across the board – spearheaded by Japan.

At the end of the day, the move is a further catalyst to global growth at a time when investors had begun to fear that earnings growth might stall in the face of slowly rising American interest rates.

Editor's Note:

• Investment Guru John Templeton's Best Foreign Investments – Go Here Now

2. Telcos Answer the Bell – But Is It Too Late?

The telecommunications industry got a shot in the arm recently after Congress announced planned bills that would make it easier for companies like SBC, Verizon and BellSouth to add television service without permission from local regulators. 

The phone companies are eager to get into the TV business so they can offset the cable invasion into their phone services.  

According to an article in Broadcasting & Cable, "Sanford Bernstein telecom analyst Jeffrey Halpern predicts the Bells will lose 15% to 20% of their consumer voice market to cable and Internet-based competitors in the next five years."

Proposed legislation is intended to help the phone giants overcome this massive fall-off. And according to the article, "Sen. John Ensign (R-Nev.), chairman of the Senate Technology Subcommittee, also is expected to help bail out the Bells with a sweeping revamp of the Telecommunications Act."

A number of lawmakers are actively seeking out a potential competitor to halt cable's domination – and challenge the industry's ability to raise programming prices at a steady 15%-a-year rate.

But it might not be enough to save the telcos.

Obviously, the cable industry is fighting the decision. But so are most city governments – who refuse to give up any of their authority in deciding fees, installation schedules and other details related to local TV and video service.

Many insist that the telcos will be unable to offer truly competitive services.

"The Bells are unlikely to offer video as quickly and broadly as they need to respond to cable's quick invasion of the telephone market," says one analyst.

Editor's Note:

• These 5 Key Trends Point to the Next Great Investment – Learn More

Editor's Notes:

• Investment Guru John Templeton's Best Foreign Investments – Go Here Now
• These 5 Key Trends Point to the Next Great Investment – Learn More
• The Hospital is a Dangerous Place – Survive Your Next Visit – Find Out How