Thursday's yuan revaluation showed an immediate upward impact on China's stock market. However, analysts are cautious of how long this will last.
The benchmark Shanghai composite index climbed 2.5 percent to end Friday's trading at 1,046.32 points, with a turnover more than double that of the previous day.
Airline and petrochemical stocks led the day's active trading as the biggest beneficiary of the yuan move, traders said.
Shares in Hainan Airlines, a regional carrier based in south China's Hainan Province, soared almost 10 percent to end at 2.33 yuan (29 US cents), on investors' expectations that China's carriers would face lower financing costs as they have a large chunk of their borrowings in foreign currencies.
Prices of China Eastern rose 7.11 percent and China Southern 4.18 percent.
Investors also poured money into refiners that rely heavily on oil imports and thus are expected to benefit from lower costs.
Sinopec, Asia's top refiner, rose 5.8 percent to 3.83 yuan (47 US cents).
"The 2 percent yuan revaluation is a direct trigger, but it is only part of the reason for today's market upturn," said Ba Shusong, a senior economist with the State Council's Development Research Center (DRC).
"June's economic data, signaling the government's loosening of its credit tightening policy, plus the progressing reform on the non-tradable shares, also helped boost investors' morale."
Ba told China Daily on Friday: "The most difficult time for China's stock market has passed."
However, other analysts were more pessimistic.
The positive impact of the yuan revaluation "may last only two or three days," said Xu Gang, research head at CITIC Securities.
"The yuan move, in the longer term, will have a negative impact on China's stock market, especially on the country's exporters," Xu said.
The change will blunt their price edge in overseas markets and burden them with higher production and operating costs as many pay their bills and employees in RMB.
During Friday's trading, investors shunned exporters. For example, the textile firm Youngor Group Co. Ltd. fell 1.75 percent to 3.36 yuan (41 US cents).
Following China's move, Malaysia also unpegged its ringgit from the US dollar to replace it with a managed float.
The new yuan regime will likely lead to further yuan revaluation over time and encourage greater currency appreciation in other Asian countries, thus leading to a burden shift of the US dollar adjustment from Europe to Asia, said David Woo, head of global Forex strategy at Barclays Capital.
At the first-day trading after revaluation, the yuan closed weaker at 8.1111 to the US dollar.
Meanwhile, Hong Kong economists, officials and industrial leaders said the appreciation of the yuan is good for the special administrative region's economy, with mainlanders' consumer power increasing.
Associate Professor at the Department of Economics of Chinese University of Hong Kong (CUHK) Kwan Cheuk-chiu expects yuan appreciation will accelerate the pace of Hong Kong's economic recovery.
The yuan's appreciation will lead to a larger tourist and capital influx into Hong Kong, which will surely enhance the local economy, Kwan said. Based on that, he has raised his projection on 2005 GDP growth by 0.5 percentage to 6 percent.
The trade sector, the city's pillar industry, will also receive a shot in the arm.
Secretary for Commerce, Industry and Technology John Tsang believes the yuan's appreciation will help Hong Kong exports become competitive on the mainland market but that it will not be too high since the appreciation rate was a mild 2.1 percent.
The city's other pillar industry, the property sector, also remains sanguine after the yuan appreciation.
Henderson Land Development Deputy Chairman Colin Ko-yin Lam said that mainland property buyers will find Hong Kong properties relatively cheap after the yuan revaluation, thus luring them to invest in Hong Kong's real estate.
That would be good to the local market, he said.
Chief analyst at Midland property Lau Ka-Fai agreed that the buying spree of mainland property by Hong Kong investors is feverish in anticipation of further yuan appreciation.
In an indirect way, Lau added the increasing number of mainland tourists will also give an impetus to the local real estate market.
"Their coming will push up the local retail sector and may boost the rent on street shops," he said, adding that the property market will also benefit.
Labor-intensive sectors would be greatly affected by the yuan rate change, said chief economist of the Trade Development Council Edward Leung.
He suggested that the yuan revaluation should have a more significant effect on Hong Kong businesses engaged in labor-intensive sectors such as apparel and footwear.
However, the impact will be little on capital-intensive industries such as electronics, telecom and jewellery.
Some also said a 2.1 percent appreciation of the yuan will play a small role in Hong Kong and another appreciation would likely bring greater impact.
HSBC chief economist for China George Siu-kay Leung argued that the Hong Kong economy would not be much affected if the yuan does not appreciate by more than 5 percent within six months.
Striking a note of caution, analysts also said the yuan move would result in rising consumer prices as imports from the mainland would be dearer.
Edward Leung, chief economist of Hong Kong Trade Development Council, said that the renminbi move would boost mainland export prices by 0.6 percent to 1 percent.
"The CPI (consumer price index) is likely to rise another extra 0.3 to 0.5 percentage point to 2 percent at the yearend as a result of dearer consumption import from the mainland," Kwan Cheuk-chiu said.
DBS also said in a report that inflation in Hong Kong will be stimulated from about 1 percent to 3 percent by early 2006.
Hong Kong's CPI stood at 1.2 percent in June, according to the latest official data.
(China Daily July 23, 2005)
