The Chinese stocks poised to gain from a stronger renminbi

Former Morgan Stanley chairman and Yale University lecturer Stephen Roach has opined in the Financial Times on ten reasons why China will continue to prosper

Image courtesy of the World Economic Forum: http://www.flickr.com/people/15237218@N00

Stephen Roach

One factor he noted was the investment gains that would be realized as China transforms itself from an export-oriented industrial behemoth into a service-based goliath. 

As that transpires, the main focus of Chinese production will increasingly become its domestic market. 

The bulk of China’s economy is presently derived from exports; in comparison, about 70% of United States gross domestic product is based on consumer spending.

With Beijing moving to strengthen the renminbi in value and increases its reserve currency role in the world, the shift to a service economy in the People’s Republic will be abetted.

A robust renminbi will make foreign goods less expensive for Chinese consumers. From this, the Chinese economy will become broader and deeper, making the country richer. As the renminbi is accepted for more imported items, as Iran recently agreed to for oil, foreign currency reserves can be deployed for other needs. With more than $3 trillion in foreign exchange reserves, this will render unto Beijing a great deal of international clout.

Companies that cater to the Chinese consumer will also gain greater market mojo. China Mobile (CHL, quote) – already the world’s biggest cell phone company in terms of customers, will expand even more. The cash earned from its Chinese customers will be more and more accepted abroad for purchases, which will serve to augment its domestic operations and franchise.

Residential construction stocks in China such as Xinyuan Real Estate (XIN, quote) will prosper as more Chinese buy homes. Companies that cater to consumer needs, such as appliance and home fixtures company Deer Consumer Products (DEER, quote) will gain. Healthcare entities, such as generic drug maker Sincere Pharmaceutical Group (SCR, quote) will also benefit from an expanding service sector in China.

There is much, much, more that China can do with a stronger renminbi accepted globally as a hard currency, which will only serve to aggrandize the consumer class in the People’s Republic. From that, service sector stocks will rise in value. For Beijing, a more powerful renminbi contributing to the enrichment of Chinese citizens will also ease concerns about a Chinese Arab Spring

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