Companies in China are anticipating a changed business landscape although the impact of the new exchange rate on the Chinese economy is likely to be initially somewhat limited.

Experts consider China's Thursday announcement to scrap the yuan's peg to US dollar probably shifted market mood and business leaders will push for the currency's continual appreciation.

"Since the currency adjustment is modest, the commercial impact will be limited. The important thing is that this first step is a prudent one, which maintains stability while moving in the direction of a more market-oriented exchange rate," Charles Martin, president of the American Chamber of Commerce in China told China Daily on Friday.

Jonathan Anderson, head of Asia-Pacific Economics, UBS, also said on Friday that while the renminbi will be allowed to fluctuate on a trade-weighted basis for a while, over time the bands will probably be widened and further appreciation can be expected against the entire basket.

Andy Xie, Asia Pacific Economist for Morgan Stanley, said the direct economic impact is minimal, considering that oil and major currencies could move this much in a day. "However, the export sector will, we believe, see a significant decline in profits as China's export sector has a thin margin to begin with."

Sectors involved in heavy international trade such as textile and manufacturing will bear the initial brunt of exchange rate reform since the appreciation of the renminbi raises exported goods' prices in foreign currencies, thus reduces the competitive edge, according to a report of the CITIC Securities.

But industries which import a large quantity of raw materials from abroad, such as iron and steel, will enjoy lower costs for importing resources, said the report.

Commodity producers, like coal miners and nonferrous metal producers would be losers in appreciation, because they source a large portion of their costs in renminbi, while their product prices are subject to international market conditions.

The appreciation of the renminbi will mitigate Chinese companies' foreign currency denominated liabilities in highly leveraged sectors, according to experts.

Ma Shang, associate director of FitchRatings China, said airlines would be potential winners on the back of the appreciation, because the foreign currency denominated liabilities make up roughly two-thirds of total borrowing in major Chinese airlines including Air China and China Southern.

However, the renminbi revaluation will exert a different impact on oil and gas sector's business lines, Ma said.

It would have a negative impact on the earnings of upstream oil companies such as CNOOC and upstream oil service companies like China Oilfield Services Limited, he said.

These companies' revenues are linked to international crude oil and natural gas prices, which are US-dollar priced, while the majority of their costs are renminbi-denominated.

But the influences of the appreciation would be much less on integrated oil companies such as PetroChina and Sinopec, because the negative impact on the upstream segment would be mitigated by the positive impact on downstream business, Ma said.

"I think the whole impact would be neutral for PetroChina and positive for Sinopec because the latter is more downstream-weighted," he said.

Whether Petrochemical companies are winners or losers will depend on their sales performance after the appreciation, he said.

Foreign companies are going to be affected differently by the new exchange rate, according to Stephen Green, senior economist with Standard Chartered Bank in Shanghai.

"Sourcing companies like Walmart will be hit with higher prices -- some of which they'll be able to pass on to their consumers. They may be encouraged to diversify some of their sourcing to other countries, such as India, but China still remains a hugely attractive sourcing market for them," he said.

"Others, American companies who make and sell goods in China will profit, since their revenues in US dollar will rise. Others, such as laptop manufacturers around Shanghai, who manufacture in China and sell overseas will be harder hit -- since their revenues are in US dollars and a good proportion of their costs are in renminbi."

(China Daily 07/23/2005 page5)