China Yuan – Trading the Chinese Currency
The Dynamic Wealth Report
December 28, 2010
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…
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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!
***Editor's Note*** Speaking of China, we just posted
our 3rd, and
final report on the best places to invest your money in 2011.
This free report gives you 3 strategies you can use RIGHT NOW to make
the coming year the most profitable of your life!
Click here for instant access to the report- you don't need to give
us a credit card, email address, or anything else for that matter!
It's yours just for being a DWR subscriber!
Because of the holiday season, not many companies are accessing the
public markets right now. 2010 was a strong year for IPOs, but the real
test will be 2011. The London Stock Exchange recently indicated they
expect 2011 to be a blockbuster year. And many private equity shops are
looking to cash out of their investments in 2011. Any way you look at it,
bankers' bonuses are looking plump in 2011!
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