Getting a Rise Out of the Yuan

GOOD MORNING. Stocks in Asia closed mixed today; U.S. futures are pointing to a lower open.

Will China finally allow its currency to appreciate? That may not seem like the most pressing matter for President Obama’s first visit to Beijing. But it’s a critical issue to financial markets and underscores the increasingly testy trade relations between the countries. And Obama took the occasion to press the point at a joint meeting with president Hu Jintao today. Letting the yuan rise would “make an essential contribution to the global rebalancing effort,” said Obama, who added that he was “pleased” to note China’s commitment to move toward a more market-oriented exchange rate over time.

Whether China will let the yuan gain value is another matter, of course. China has long had a policy of letting the yuan slowly appreciate but has kept it pegged at 6.83 to the dollar since July 2008, in response to the financial crisis. A rising yuan could help address global trade imbalances, especially the soaring U.S. trade deficit with China. And IMF chief Dominique Strauss-Kahn also urged China to let the yuan rise a bit quicker. The dollar, meanwhile, has been trading at 15-month lows against major currencies, and China has been purchasing dollars by the trillions to stop its slide even further; it now holds over $2.3 trillion in dollar reserves, twice the level of any other nation.

Ideally, the U.S. would like China to bolster domestic consumption and become less reliant on exports to fuel GDP growth. But it’s a sensitive issue in China, which has become a global power on the strength of its export machine and doesn’t want to take steps that could derail it. China has the world’s fastest growing major economy, expected to post growth of 8.9% next year, according to Standard Chartered Bank. But China’s recovery is still fragile, analysts say, and China has grown nervous about rising U.S. protectionism, which has emerged in new U.S. tariffs on Chinese-made tires, steel pipes and other goods. At their joint appearance today, Hu said the U.S. needs “to oppose and reject protectionism in all its manifestations.”

If China does allow the yuan to rise (by more than a token amount), analysts say it will be a sign that China is moving from an export-driven economy to one fueled more by domestic consumption. That would be more along the lines of the U.S. model, where spending accounts for over two thirds of the economy--though analysts don’t expect that to happen anytime soon.

IN OTHER NEWS:

Investors in La-Z-Boy Inc. (LZB) may be able to relax a bit when the company reports its fiscal second quarter earnings after the market closes today. Analysts are expecting somewhat comforting news – earnings of 12 cents a share, much better than the company’s loss of 26 cents a share in the same quarter a year ago. Revenue is expected to be $284.76 million, representing a 14.2% decline from the year-ago period.

La-Z-Boy has been suffering from the downturn alongside other furniture companies. Sales at furniture stores in the first ten months of 2009 were 12.4% lower than sales in the same period last year, according to the Commerce Department’s most recent retail sales report. Retail furniture sales may have flattened out, but the sector hasn’t seen significant improvement yet, says John Baugh, an analyst with Stifel, Nicolaus & Company.

Deep cost cuts have helped La-Z-Boy improve its margins and beat earnings estimates in recent quarters, says Brian Sozzi, an analyst at Wall Street Strategies. The company has moved almost all of the manufacturing for its upholstery division to Mexico, and has also increased efficiency by adopting cellular manufacturing techniques, Sozzi says.

Right now, La-Z-Boy has an edge over competitors like Ethan Allen Interiors (ETH) because it produces more upholstered furniture--items which tend to sell better than wood in a tough economy, Baugh says. “They have the advantage of being in the right category during a recession,” he adds, as well as offering furniture at lower price points. Ethan Allen reported a narrower-than-expected loss of 22 cents a share for the quarter ending in September.

When La-Z-Boy reported for its fiscal first quarter, management suggested the environment was likely to be “challenging” for the rest of the year. Investors will be watching to see if improved margins and lower-priced products can continue giving this company room to maneuver despite lackluster sales.