Two Easy Ways To Play The U.S.-China Trade Debate With ETFs (UDN, UUP, CYB, FXI, VWO, EEM)
Tony Sagami: The White House recently rolled out the red carpet for the next president of China, Xi (pronounced “shee”) Jinping, in what many called a “critical” visit for the United States to build relations with the man expected to assume China’s presidency in March 2013.
President Barack Obama hosted a lavish dinner for him, Treasury Secretary Hillary Clinton invited him to address the State Department, and the Pentagon honored him with a 19-gun salute. As part of his tour of the United States, Xi even squeezed in a visit to an American farm and attended a basketball game.
In Xi’s own words, he came to the United States “to deepen mutual trust and expand our cooperation.” And as Xi is preparing to lead his country, the U.S. presidential contenders are also eyeing the U.S.-China connection as a hot-button topic.
With China (NYSEArca:FXI) as our biggest creditor, and with a complicated relationship in place when it comes to trade, currency and other global issues, our two countries are deeply intertwined … and will be for a long time to come.
Today we’ll look at some of those pressing issues, and I’ll also give you two ways you can potentially benefit from them as an investor.
Growing Trade, but a Growing Imbalance
One of the stops on this trip was to Iowa, where Xi also visited on a 1985 trip to the United States when he was working to promote agricultural ties between the countries.
When it comes to how much the U.S.-China relationship had changed since then, he told The Washington Post: “When I visited the U.S. for the first time in 1985, our bilateral trade was merely $7.7 billion, and only some 10,000 mutual visits were made each year. Last year, our trade topped $440 billion, and mutual visits exceeded 3 million.” (You can read the full Q-and-A transcript here.)
That is certainly a huge increase, and something for both countries to be proud of, but Xi’s numbers don’t tell the whole story.
In 2011, the United States sold $103.8 billion worth of goods to China, but we imported $399.3 billion — a staggering $295.5 billion difference.
That trade imbalance is the largest nation-on-nation trade deficit EVER between two countries. Our trade deficit with China is 28 times bigger than it was during the Reagan administration and has grown by an average of 18% a year since China entered the World Trade Organization in 2001.
Those numbers are why China has been increasingly depicted as less of a trading partner than a rival by everybody — whether Republican or Democrat — who wants to be elected president of the United States next year.
Election-Year Tough Talk
Obama and his administration have been very critical of China.
“I will not stand by when our competitors don’t play by the rules. It’s not right when another country lets our movies, music and software be pirated. It’s not fair when foreign manufacturers have a leg-up on ours only because they’re heavily subsidized,” Obama said in his State of the Union address.
Obama even created a Trade Enforcement Unit responsible for gathering evidence of unfair Chinese trade policies.
Even the historically free-trade Republicans are wagging their fingers at China.
Mitt Romney, appearing at a Toledo, Ohio, factory that makes fenceposts, claimed that China has hurt American businesses by “cheating” and keeping the Chinese yuan artificially low to gain a trade advantage over American businesses.
“By virtue of doing that and holding down their prices, they were able to put American businesses out of business and kill American jobs,” he said, adding that “If I’m president of the United States, that’s going to end.”
Romney continued, “On day one, I will declare China a currency manipulator, allowing me to put tariffs on products where they are stealing American jobs unfairly. We can compete when there’s a level playing field and we’d win. … I’m going to insist that China plays by the same rules that everyone in the world plays by.
“We will not let China continue to steal jobs from the United States of America,” he warned.
Rick Santorum has emphasized China’s poor record on human rights, its one-child policy and its constraints on religious freedom, but he too has spit out some very tough trade talk.
“I want to go to (economic) war with China and make America the most-attractive place in the world to do business,” he said.
Santorum has issued perhaps the shrillest rhetoric of anybody when he said China has a policy of “godless socialism.” Ouch!
Newt Gingrich has been the least vocal of the Republican candidates, but he too has threatened to levy some trade sanctions against China if he becomes president.
“In terms of dealing with China strategically, I think we’re going to have to find ways to dramatically raise the pain level for the Chinese cheating, both in the hacking side, but also on the stealing and intellectual property side,” Gingrich said.
What Does All This China-Bashing Mean to Us as Investors?
I actually think that all of this anti-China and trade sanction talk is just that — TALK — but the volume may be a little louder because of the 2012 elections. However, I don’t expect any substantial moves from either side.
What I do expect, though, is that (a) the U.S. dollar (NYSEArca:UUP) will continue to lose value, and (b) the Chinese yuan will continue to appreciate. And there is some money to be made by investing in those two trends.
If You Want to Bet AGAINST the Dollar …
Take a look at the PowerShares Deutsche Bank U.S. Dollar Index Bearish ETF (NYSEArca:UDN). This ETF is meant to track the Deutsche Bank Short U.S. Dollar Index (USDX), a benchmark composed solely of short U.S. dollar futures contracts. These futures contracts are designed to replicate the performance of being short the U.S. dollar against a basket of six major currencies.
If You Want to Bet FOR the Chinese Yuan …
I believe the easiest way to profit from an appreciating yuan is to invest in a currency ETF that follows the yuan, such as the WisdomTree Dreyfus Chinese Yuan ETF (NYSEArca:CYB).
This ETF is designed to appreciate in lockstep with the Chinese yuan against the U.S. dollar. If the yuan appreciates, you should make money.
Now, I’m not suggesting that you run out and invest in UDN or CYB tomorrow morning. As always, timing is everything, so I recommend that you wait for my buy signal in Asia Stock Alert.
There’s another way to play the long-term dynamics of the yuan to the dollar … and in my Asia Stock Alert service, my subscribers are sitting on a nice 16%-plus gain in a conservative, low-volatility name that invests in the short-term AAA debt of the world’s strongest economies and monetary policies.
To get the full details, you have to be a member. But it’s easy to see how we’re playing the dollar’s move against other world currencies — simply click here to take the service for a test-drive today!
Related: iShares MSCI Emerging Markets Index Fund (NYSEArca:EEM), Vanguard Emerging Markets ETF (NYSEArca:VWO).
Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended inUWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Roberto McGrath, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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