"I've long believed that China's currency is due to appreciate notably against the buck," says currency expert Jack Crooks, upon returning from speaking at a Forex seminar in Beijing.
In his World Currency Alert he explains, "Until now, there's been no straight-forward, highly-liquid way to play it. Now there is: the WisdomTree Chinese Yuan Fund (NYSE: CYB)."
"I now think it makes sense to secure some exposure to the Chinese yuan. There's been a major U.S.-China dynamic that's drastically altered the global economic landscape over the last several years. It goes a little something like this:
- China sends goods to the U.S.
- The U.S. sends dollars to China.
- China sends dollars back to U.S.
- The U.S. sends treasuries to China.
"Ultimately, China supplies the globe with liquidity. Behind this capital flow is an artificially undervalued Chinese yuan. This exchange rate situation is why China has become a major supplier of goods and capital to the rest of the world.
"They've taken the dollars they've earned by selling loads of cheap stuff to the United States and invested it across the globe - effectively supplying liquidity to the global economy.
"Capital flowed freely in this model during a period of credit expansion. Simply put: the consumer had no qualms about buying up all kinds of goods shipped from China when money was easy to come by. But the credit situation is the obvious pivot point for this dynamic.
"Now that credit expansion has effectively spun into a credit contraction, consumers are having second thoughts about all kinds of spending - especially on the boatloads of trinkets that China exports on
any given day.
"Here's where the exchange rate comes into play. A weak yuan benefits Chinese producers and foreign consumers. Chinese producers who send their low-priced goods overseas where purchasing power is much greater make out like bandits.
"At the same time, Chinese consumers suffer from paltry purchasing power, and foreign producers have trouble competing with Chinese producers. On the flip side, a stronger yuan will shake up this dynamic.
"Double-digit growth in China's economy has given them plenty of wiggle room to increase interest rates (among taking other measures) in an effort to ward off inflation. A byproduct of these efforts has
been an appreciating currency.
"And while small, the yuan has made a steady advance since being de-pegged from the U.S. dollar. I personally believe the yuan has a lot further to climb because it will put increasingly more power into the hands of the Chinese consumer.
"And top ranking officials will soon realize, if they haven't already, that it's in their best interest to shift the dynamic in this direction. In April, food prices alone surged more than 22%. And in a land where buying food encompasses the majority of household income, something must be done.
"To accomplish this, they can raise interest rates further than they already have. In fact, they most likely will, but they can also reduce capital controls. They might also consider removing the capital controls that limit Chinese citizens from investing their savings abroad.
"Bottom line: the obvious path for China is to continue to allow their currency, the yuan, to appreciate. After that, they may or may not make various other policy changes as the economic landscape shifts. But what's important is that you position yourself with exposure to a rising yuan - hence, our buy recommendation for the WisdomTree Chinese Yuan Fund."
Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.
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