Tony Sagami: Before it was just the Obama administration, but now, just about everyone who is running in the 2012 Presidential race is jumping on the anti-China (NYSE:FXP) bandwagon.
The U.S. Senate is proud of a recently passed bill that will impose new tariffs on imports from nations with undervalued currencies. By a vote of 63-35, the Senate passed the Currency Exchange Rate Oversight Reform Act, which will permit issuing sanctions against countries if our Treasury Department concludes they are intentionally undervaluing their currency.
This bill might not target China (NYSE:FXI) by name. But it is squarely aimed at China, who is accused of keeping its currency intentionally undervalued to make its exports cheaper while hurting U.S. manufacturers and stealing American jobs.
The claim about stealing jobs is usually tied to the gigantic trade deficit that we run with China. Last year the deficit hit $252 billion, which was the largest between any two countries in the world.
Of course U.S. politicians and most Americans fail to acknowledge that the wage disparity between China and the U.S. — $1 vs. $23 — is the largest cause of the trade deficit.
Nonetheless, I believe that the Chinese currency is undervalued by around 20% to 40%. This holds true despite the fact the Chinese yuan has appreciated by 30% against the U.S. dollar since 2005 when China discontinued its peg against the greenback.
And the yuan is up another 5.2% so far this year.
China is not happy about this new bill and has made its objections very clear. What’s more, Chinese officials have warned that any trade sanctions would “seriously affect” relations between the two countries and could lead to a trade war.
China’s Foreign Ministry said the bill violates the rules of the World Trade Organization. And the Chinese Ministry of Commerce called it “unfair” as well as a violation of international practice.
Perhaps frustrating Chinese leaders the most is the belief that failed U.S. economic policy, not their own, is the reason our economy is struggling and the dollar has lost its purchasing power.
It would be a big mistake to think that China is going to roll over and take these threats without retaliatory action.
“Kill the chicken to scare the monkey” is an old Chinese proverb that is used to justify harsh public punishment as a very clear warning sign to everybody else. And that is exactly what China is doing.
Let me give you two examples…
EXAMPLE #1: The Chinese government ordered 13 Wal-Mart stores CLOSED for 15 days, fined the company $423,000, and put two of its employees in jail. Plus, the chief executive for China and its top human resource executive resigned for “personal reasons.”
The ostensible reason for the closure was that Wal-Mart sold regular pork as more-expensive organic pork.
Wal-Mart entered the Chinese market in 1996 and currently operates 353 stores in 101 cities and has over 50,000 employees in China.
The company operates more than 8,400 stores in 15 countries under 55 different banners, and serves more than 200 million customers per week. China currently contributes about 10% of Wal-Mart’s revenues, however, that number is growing.
Wal-Mart reported a 5.5% increase in Q2 sales. But that number would have been flat to negative if it wasn’t for the 16.2% increase in non-U.S. sales. “We continue to prioritize our investment in the emerging markets of China, Brazil and Mexico,” said Wal-Mart International CEO Doug McMillon.
EXAMPLE #2: Yum! Brands operates Pizza Hut, Taco Bell, and KFC restaurants and currently gets more than 50% of its sales from outside the U.S.
Yum! Brands is pinning its future hopes on China. The company recently made an offer to buy Little Sheep restaurants, which is one of the largest restaurant chains in China.
Little Sheep, which was founded in 1999 and has more than 400 Mongolian hot-pot restaurants, sold 93% of the company to Yum! Brands for $573 million.
Well, at least Yum! Brands thought it did until the China Ministry of Commerce put a halt to the purchase and began reviewing Yum’s buyout for anti-trust and anti-competitive violations.
But hey, maybe the Wal-Mart and Yum! Brands problems in China are a complete coincidence and have nothing to do with the Currency Exchange Rate Oversight Reform Act.
The Chinese government is killing the chicken to scare the monkey. In this case, the chickens are Wal-Mart and Yum! Brands. And the monkey is the politicians in Washington D.C.
What does this mean to us as investors? I actually think that all of this anti-China and trade sanction talk is just that — TALK. The volume may be a little louder because of the 2012 elections, but I don’t expect any substantial moves from either side.
What I do expect though is that (a) the U.S. dollar 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 (NYSE:UDN). This ETF is meant to track the Deutsche Bank Short U.S. Dollar Index (USDX) Futures Index, 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 (listed below).
If You Want to Bet FOR the Chinese Yuan…
The best 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 (NYSE: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.
And if you’re just looking for a conservative place to park your money, take a look at the Merck Hard Currency fund (MERKX), which invests in the short-term AAA debt of the world’s economies with the strongest economies and monetary policies. This fund is essentially a non-dollar money market fund with very low volatility.
Now, I’m not suggesting that you run out and invest in any of those securities tomorrow morning. As always, timing is everything, so I recommend that you wait for them to go on sale or wait for my buy signal in Asia Stock Alert.
I need to disclose that my Asia Stock Alert subscribers already own MERKX and are sitting on a nice, fat gain.
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 in UWD, 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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