China Yuan – Trading the Chinese Currency
Every day I watch currency markets… it’s what I do. Nothing is more exciting than finding an undervalued currency. The country’s economy might be heating up and the economic news is turning positive. Before long, the currency jumps in value… and big gains can be had by nimble traders.
Remember, news and economic data are the fundamental numbers every currency trader watches closely. Data on GDP, unemployment, consumer prices, and interest rates are watched like a hawk.
Take China for example…
The Chinese economy is hot and their currency is poised to move higher. How do I know?
Let’s look at the facts. The IMF recently adjusted their growth estimates for China. They now believe China will rack up 10.5% GDP growth in 2010 and 9.6% GDP growth in 2011.
But estimates change all the time… Let’s dig a bit deeper.
The Chinese Purchasing Managers Index, or PMI, is a good way to measure economic activity. The China Federation of Logistics and Purchasing recently announced PMI rose to 55.2 in November from 54.7 in October. It shows manufacturing activity is growing.
But that’s not the only indicator.
Higher employee wages are also a big indicator of economic activity. According to the Wall Street Journal, 2010 wages in 20 different Chinese provinces jumped between 20% and 30%. And even more telling, business owners “expect that wages will continue to increase at double-digit rates for the next few years”!
You don’t have to be Warren Buffett to connect the dots.
GDP is growing rapidly. Manufacturing activity is rising. And owners need to pay their employees more. A strong economy and higher wages mean bigger spending ahead by families in China. Some estimate total consumption will be over $2.5 trillion by 2025.
So what’s it mean for the Chinese Yuan?
Front and center is the threat of inflation.
In November, the Chinese Consumer Price Index (CPI) was up to 5.1%. That means prices consumers are paying for goods and services are jumping. That’s called inflation! It’s such a threat that The People’s Bank of China raised interest rates over the weekend… the second time in three months!
The central bank is removing liquidity from the banking system. They’re increasing banking reserves (six times this year already) and over the summer they imposed new restrictions on real estate… bumping up required down payments and curbing speculation.
It all points to an economy growing rapidly, with interest rates poised to jump even further and a currency that should be moving higher.
These three factors will attract investments from all over the world, driving the Yuan even higher. But there’s a problem.
China is a notorious manipulator of their currency.
They’ve done it for as long as anyone can remember. It’s part of their communist identity. Control by the central government is key… and that extends to the Yuan. It’s a way for the government to significantly influence their economy. Remember, a low Yuan helps exports and encourages economic activity.
Recently we’ve seen signs of the government’s iron grip loosening.
At the recent G-20 meeting, China announced they’re going to allow the Yuan to increase gradually. Now, many investors are going to rush out and buy the Yuan, but I think it’s a mistake.
See, the Yuan is still manipulated by China’s government… and will be for years.
You could play the Yuan currency trade buy buying a Chinese Currency ETF. But in my opinion, the potential returns will always have a ceiling put in place by the government. If you want to really profit from the red hot growth of the Chinese economy, you’re better off buying a Chinese stock ETF or investing in individual stocks of Chinese companies.
The economy is growing rapidly and most Chinese companies should grow right along with it!
Category: Foreign Markets
