Signs have emerged in the past two weeks that China is paving
the way for itscurrency to start appreciating. It may take a year
or two to see even a 10% or 20% rise, and practically nobody else
is writing about this at all (which surprises me), but this will
mean big ramifications for investors.
Under steady pressure from the United States, Chinese policy
planners have generally shrugged at the prospect of letting
itscurrency appreciate. In recent months, other trading partners in
Asia, along with emerging powerhouses such as Brazil have also
chafed at acurrency policy that has been seen to help China and
hurt the rest of the world. Although the rising pressure has
certainly been noted in Beijing, Chinese planners have long sought
to let theircurrency appreciate when they're good and ready.
That time finally seems to be at hand.
Laying the groundwork
China'scurrency has actually begun to modestly appreciate in recent
months. Six months ago, 10 yuan were worth about $1.46. That figure
has steadily risen to a recent $1.52, though many economists think
that if the yuan actually freely-floated on worldcurrency markets,
10 yuan it would be closer to being worth $2.
Yet a number of steps need to be taken before the yuan is truly
unfettered. For starters, businesses need to be able to ink deals
in yuan outside of China's borders. That step was taken for Hong
Kong a few months ago, and just this week, a group of China-based
companies got the green light to enter into yuan-denominated
contracts elsewhere in the world. It's only a small scale effort,
but it's a start.
More intriguingly, the state-owned Bank of China has authorized
foreign branches to start buying and selling yuan. That's a tricky
move, because if foreigners start to speculate on an eventual
steeper rise in the yuan, then many will seek to sell dollars and
buy yuan. Right now, it's a bit hard to gauge the actual value of
the yuan in a freely-floatingcurrency world, but as noted above,
the yuan is likely undervalued by at least 20%.
The lessons from other central banks that try to artificially
depress the value of their
need to be heeded. In places like Venezuela, locals and foreigners
alike sell dollars in the black market, as they can do much better
than the bank-sponsored rate. As China takes further steps to open
up the yuan, pressure builds to make even more aggressive moves,
lest a black market emerge.
Will all this play out in 2011? Probably not, but China's "beggar
thy neighbor"currency policy does look set to end within the next
few years. In the mean-time, the yuan may be allowed to appreciate
further against the dollar, perhaps up to the $1.60 per 10 yuan
Looking over the horizon
So if we are on a path that gets the yuan to strengthen -- perhaps
by 20% to 25% from current levels -- you need to start thinking
about your investment moves now. Here are just a few examples of
the investment implications:
- A fast-rising consumer class has taken to luxury goods, as
was the case when Japan became affluent in the 1980s. American
and French brands have huge cachet with the managerial and
executive class in China. A recent report from the Boston
Consulting Group predicted that Chinese spending on luxury goods
would surpass the United States some time this decade.
is already marking 20% annual sales gains in China. Other branded
firms such as
have been building a Chinese presence for the last decade and are
now counting on that market for the bulk of future sales growth.
And as I noted earlier this week,
thinks that China will be a big part of its sales mix in coming
years. [Read why
Morgan Stanley thinks GM
could jump 150%]
- A rise in the yuan is bad news for many electronics
manufacturers that rely on Chinese plants for a steadily rising
share of their output. Virtually no major tech firm is immune,
Apple (Nasdaq: AAPL)
. Those firms will need to seek out even cheaper countries such
as Vietnam, or will have to raise prices to preserve margins.
Mexico could be a clear beneficiary as multinationals with plans
in multiple countries shift production back closer to home.
- Chinese tourism also looks set to move to a higher plane.
Until now, many Chinese consumers have begun to venture out
around their own country or to Asian neighbors. But with an
increase in spending power, they'll increasingly look to travel
to Europe and the United States. That should be a real boon to
the global lodging and entertainment stocks such as
Marriot International (
Starwood Hotels (HOT)
Walt Disney (DIS)
. (If you have kids who want to work in the hospitality industry,
have them start learning Chinese now).
- Chinese stocks would hold more appeal to U.S. investors
simply because a move in thecurrency impacts a stock or fund by a
commensurate amount. For example, the
PowerShares Golden Dragon Halter USX China Fund
, which invests in companies in mainland China, would rise 20% if
the yuan appreciates 20%, all other things being equal.
Action to Take -->
You should pay attention to what's coming out of Beijing these
days, because itscurrency moves will likely affect your portfolio
in one way or another.
A rising Chinese consumer class should stimulate demand for certain
U.S. imports, and highly-automated industries will become more
competitive vis-a-vis their Chinese rivals. We may even see more
Chinese companies acquire U.S.-based firms, which in itself
mayyield job creation. The areas above are just some of the ways
your portfolio could be affected. But a correct reading of the tea
leaves could protect you just as well as help youprofit .
-- David Sterman
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.