(Bloomberg) — China’s rising yuan has given equity investors a touchstone in their search for potential winners and losers.

Benchmark stock indexes in both Hong Kong and on the mainland have been buoyed by the recent strength of the yuan, as capital chases assets denominated in a strengthening currency. The correlation between China’s benchmark CSI 300 Index and the onshore yuan’s strength is near the highest in seven months, while the Hang Seng Index is also most-linked to the currency’s movements since February, data compiled by Bloomberg show. But not every share is a beneficiary.

Likely winners include companies that can take advantage of currency dichotomies, including Chinese property developers with sizable dollar debt and companies that generate most revenue in the mainland but are Hong Kong-listed, according to analysts.

On the flip side of the currency equation are exporters, whose products will be less price-competitive when sold in foreign markets.

The Chinese yuan has surged 12% against the dollar since May 2020, with the rally accelerating recently amid inflation concerns and the greenback’s weakness. Some investors expect the yuan rally continuing, despite the central bank taking a visible measure to stem gains.

“The central bank’s intervention will only slow down the pace of appreciation, not the direction of the appreciation,” said Jackson Wong, an asset management director at Amber Hill Capital Ltd. “A rising Chinese currency historically has a positive correlation with both mainland and Hong Kong benchmark indexes, though some sectors will suffer.”

Who wins:

• Dollar-debt borrowers: Companies to benefit most directly will be those that generate revenue in yuan while borrowing in foreign currencies, as debt is reduced. According to Bloomberg data, about 24% of the total outstanding dollar-denominated bonds issued by all Chinese companies are from developers.
• Hong Kong-listed Chinese companies, or H shares: A stronger yuan bodes well for the H shares, as well as valuations and foreign inflows, said CICC analysts including Hanfeng Wang. While some investors may worry that a strong yuan could discourage southbound inflows because of potential foreign-exchange losses, historical experience suggests those inflows are positively correlated with the yuan, as a stronger yuan usually suggests better growth prospect for Chinese assets, Wang said.
• Consumer companies: A rising currency enhances purchasing power and consumer confidence, which benefits the consumer sector, said Yang Delong, chief economist at First Seafront Fund Management.

Who loses:

• Labor-intensive exporters: Manufacturers such as toy makers, which rely on cheap prices to attract customers and generate most revenue overseas, may take a blow from a stronger yuan, Zheng Jiawei, analyst at East Asia Qianhai Securities, wrote in a research report.
• Foreign-asset owners: Textile manufacturers and machinery companies will suffer, as they tend to have large proportions of assets denominated in foreign currencies, said Cliff Zhao, head of research at CCB International.

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