{"id":38771,"date":"2013-06-05T12:09:42","date_gmt":"2013-06-05T16:09:42","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=38771"},"modified":"2013-06-05T15:09:00","modified_gmt":"2013-06-05T19:09:00","slug":"whats-next-for-the-chinese-renminbiand-what-does-it-mean-for-investors","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/06\/05\/whats-next-for-the-chinese-renminbiand-what-does-it-mean-for-investors\/","title":{"rendered":"What\u2019s Next for the Chinese Renminbi\u2026and What Does it Mean for Investors"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

If you are to believe U.S. politicians and talk radio hosts, China\u2019s renminbi is managed by a sinister cabal of James Bond villains who intentionally suppress the value of the currency to give their manufacturers an advantage and to hollow-out U.S. manufacturing.<\/p>\n

\u00a0\"US<\/a><\/p>\n

While that view of China\u2019s ruling Communist Party isn\u2019t completely fantastical, the truth is a little more complicated. When China\u2019s leaders decided in the 1980s that \u201cto get rich is glorious,\u201d they decided that a weak currency was a convenient way to make that happen.\u00a0 From a value of 1.50 yuan per dollar in 1980, the renminbi fell to nearly 9 yuan per dollar before China instituted a peg at 8.27.\u00a0 The renminbi was pegged at that level from 1997 until 2005, when\u2014pressured by the United States and other trading partners\u2014China opted for a managed float that would allow for a gradual rise.<\/p>\n

The precise rules that control the float have changed multiple times as China has become more lenient, and currently the price of the renminbi is allowed to fluctuate within a daily 1% band against a basket of major world currencies.<\/p>\n

(Note: I\u2019m often asked why China\u2019s currency has two names: the renminbi and the yuan.\u00a0 \u201cRenminbi\u201d is the currency\u2019s official name.\u00a0 \u201cYuan\u201d is a unit of renminbi.\u00a0 The price you see quoted in a Chinese store would be, say, 5 yuan.\u00a0 You would never see a price quoted as 5 renminbi.\u00a0 This is not too different than the British pound sterling. \u00a0\u201cPound sterling\u201d is the currency\u2019s name, but prices in the UK are quoted in pounds, not sterling.)<\/p>\n

As a country with a massive export economy and the largest current account surplus in the world\u2014$214 billion as of 2012<\/a>\u2014China\u2019s currency should naturally appreciate in value due to market forces (all else equal, a large trade surplus leads to a rising currency as it, in effect, involves selling the currency of the importing country to buy the currency of the exporting country).<\/p>\n

And indeed, the renminbi has been gaining on the dollar since it was de-pegged.<\/p>\n

Not entirely coincidentally, China has also become less competitive as a manufacturer.\u00a0 In fact, just this week one of China\u2019s leading shoemakers moved part of its manufacturing base to Africa<\/a> to take advantage of the lower costs!<\/p>\n

The rising value of China\u2019s currency is certainly part of the reason for China\u2019s loss of competitiveness.\u00a0 A bigger issue\u2014and one for which there is no easy solution\u2014is the rising cost of Chinese labor, which is growing at a double-digit clip.<\/p>\n

China\u2019s manufacturing model assumes an inexhaustible supply of cheap migrant labor from the countryside.\u00a0 But after 30 years of growth\u2014and over 30 years of the One Child Policy\u2014the pool of labor is simply no longer there to exploit.\u00a0 This means that China will have to invest more in capital in order to boost competitiveness\u2026or simply massively devalue its currency again.<\/p>\n

There is a big problem with that second option.\u00a0 China\u2019s leaders are already worried about inflation, and they are reluctant to do anything that will fan those flames.\u00a0 And China\u2019s middle classes\u2014which become more assertive every day\u2014are less likely to tolerate high inflation or higher prices for imported goods.<\/p>\n

If the Chinese Communist Party wants to keep its grip on power, it has to keep its restive masses happy.\u00a0 And this means that any devaluation of the renminbi will be gradual, if it happens at all.<\/p>\n

What does any of this mean for investors?<\/p>\n

If you are going to invest in China, invest in companies that benefit from rising living standards among Chinese workers.\u00a0 Go for consumer goods and services rather than industrial companies and exporters.<\/p>\n

China Mobile ($<\/span>CHL<\/a>)<\/b> is a fine example. China Mobile is the largest mobile phone operator in the world by subscribers, and as Chinese consumers trade up from feature phones to smart phones, the company is well positioned to benefit.\u00a0 It also trades for just 10 times earnings and yields 4% in dividends.<\/p>\n

China will eventually \u201cblow up,\u201d as its aging demographics and persistent asset bubbles virtually guarantee a Japanese-style malaise.\u00a0 But in the meantime, there is still money to be made investing in the Chinese consumer.<\/p>\n

Sizemore Capital is long CHL. This article first appeared on InvestorPlace<\/a>.<\/p>\n

SUBSCRIBE\u00a0<\/b><\/a>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

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