Newly liberated yuan could cool China tech sector
(USA Today)
Updated: 2005-07-25 13:46

A rising Chinese yuan could dampen the Chinese technology industry just as it tries to break into international markets.

Last week, China announced it will stop pegging its currency to the U.S. dollar. That peg had kept the yuan artificially low vs the dollar - as much as 40% undervalued, some experts say. That has given Chinese-made products a huge price advantage on world markets.

China's government set tight parameters on how much the yuan could rise, so it's not likely to rise much in the short term. But within a decade, the yuan could go from about 8 to $1 now to about 5 to $1, according to estimates. In the longer term, a strong yuan could slow two hot trends:

It would make investing in Chinese tech start-ups more expensive. U.S. venture capitalists have been pouring into China. In 2004, VCs pumped $1.3 billion into tech companies in China, up 30% over 2003. The figure will be even higher in 2005.

"Five or 10 years from now, a dollar will buy less of a company" in China, says David Chao, co-founder of DCM-Doll Capital Management, an investor in nine Chinese tech start-ups.

That might make U.S. VCs more wary of pumping money into China. In turn, that would be a blow to China's ability to get young tech companies off the ground. China doesn't yet have a system of venture capital, and banks rarely loan money to start businesses.

However, there's a potential upside to unlinking the yuan and dollar. It will make the Chinese economy more stable for foreign investors, and cool off the mounting tension with the U.S. government.

Chinese tech products would become more expensive in other countries. China's tech companies are itching to build international brands. Personal computer maker Lenovo bought IBM's PC division. Networking firm Huawei Technologies is moving to compete with Cisco Systems. A rising yuan could brake such efforts.

During the next couple of years, though, a rising yuan should give a boost to U.S. investors in Chinese tech companies. Money made by those companies in China will be worth more in U.S. dollars.

"Any dollar investment in (a yuan)-denominated business is going to get a huge upside," Chao says. "Ten years from now, I wouldn't be surprised if the yuan is down to 5 or 6 to the dollar, which would mean we'd get an automatic 40% boost on our returns."

That might also boost the returns for U.S. stockholders of Chinese tech companies. In the past year, Chinese companies, such as job-search Web site 51Job and chipmaker SMIC, have gone public on the Nasdaq, and the trend is expected to continue.

(Courtesy of USA Today)

All in all, it can be difficult to predict the ultimate impact of a rising yuan on China's tech industry. If it makes products more expensive overseas, exports might fall. But if it puts more spending power in the hands of Chinese citizens, they might buy more tech products, boosting domestic sales.

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