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China’s Currency Move a Success
July 20, 2010
When the Chinese government changed its currency policy last month to allow appreciation of the renminbi (Rmb), skeptics like New York Times columnist Paul Krugman called the move a lame ploy to placate U.S. and European critics ahead of the G20 summit.
It appears this judgment may have been too quick and too harsh.
The renminbi gained 0.70 percent against the U.S. dollar in the first couple of weeks after it was unpegged from the dollar. That works out to an annualized rate of about 15 percent—a monumental move in the currency world.
In fact, CLSA’s Andy Rothman says that the policy change has been so effective that Beijing will actually have to curb renminbi appreciation to keep it at the annual target rate of 5-7 percent.
Rothman points out that the immediate appreciation is far higher than the average monthly rate seen in the 2005-2007 period (chart), when the renminbi’s exchange rate was last allowed to float.
The soft U.S. job market has been focusing blame on China for the decline of American industry, but Rothman reminds us that the U.S. manufacturing sector has been shriveling for more than half a century – from 23 percent of American workers in 1949 to 16 percent in 1989 (when Chinese imports were still “insignificant”) to 9 percent today.
The Chinese government has much higher aspirations than being the world’s factory of cheap goods. This year we’ve seen the government raise minimum wage requirements across the country and move to improve labor conditions.
This is all part of a longer-term plan to move up the manufacturing food chain and build a stronger base for domestic consumption. A stronger renminbi that enhances the purchasing power of both Chinese importers and the average citizen fits well into that vision.
Chart of the Week – Yuan Winners
July 01, 2010
A stronger Chinese yuan makes exports into China cheaper and imports from China more expensive.
The U.S. stands to benefit both ways – Chinese consumers get more purchasing power for high-end American exports, and domestic manufacturers will be better able to compete against Chinese producers and help America chip away at its massive trade deficit with China.
Other countries stand to benefit as well, perhaps none so much as Indonesia and India.
The chart below from our Weekly Investor Alert shows how stock markets performed in the Asia region from mid-2005 to mid-2008, the last period when the yuan was not tightly pegged to the U.S. dollar.
The top performer was China itself, but then came Indonesia’s stock market at 104 percent and India at 83 percent.
Indonesia is a major natural resource producer, and China is one of the main markets for its liquefied natural gas, palm oil, wood pulp and rubber. India competes with China in a range of manufactured products, including textiles and electric components. A stronger yuan could make Indonesian and Indian products more attractive to Chinese buyers (assuming the rupiah or the rupee is not appreciating at the same pace).
China, Indonesia and India are all countries we watch as part of our “E-7” group of the world’s most populous emerging economies, and we will be watching as well to see the short-term and longer-term impact of yuan appreciation on the relationships among these nations.
Steel Supports Recovery
June 24, 2010
One good way to measure the strength of the global recovery is with a steel yardstick.
At 124 million metric tons, global crude steel output last month was up 29 percent year over year due to growing demand, and it was nearly 10 percent above pre-recession levels in May 2007.
For the first five months of the year, worldwide production exceeded 580 million metric tons, according to World Steel Association figures. Mills have been running at above 80 percent capacity since February – compare that to the mid-60s in the same months of 2009.
China accounts for close to half of global production – 265 million metric tons so far this year, up more than 20 percent from the first five months of 2009. China is now on track to consume 600 million metric tons this year, but analysts expect demand to slow in the second half of this year in response to Beijing efforts to put the brakes on runaway growth.
But that’s a short-term sidebar to the long-term growth story, which is being driven in large part by the rapid middle-class expansion in China, India, Brazil and other key emerging markets.
Infrastructure specialists at Macquarie expect global steel production to increase by 339 million metric tons per year by 2014, and it says China will account for 59 percent of that growth.
Chart of the Week – Chinese Wages
June 23, 2010
Labor unrest is rising in various forms in China, with industrial workers using their power of numbers to try to secure higher wages and better working conditions. The protests have been peaceful for the most part, though some have involved clashes with police.
The workers are having some success – examples include tech company Foxconn, which recently gave employees a 60 percent raise, and car maker Honda, which boosted pay by 20 percent.
Labor costs are, of course, one of the key inputs in the cost of production, so economically it stands to reason that significantly higher wages may result in significantly higher prices for finished products. In the U.S., for example, labor can account for up to 70 percent of a company’s overall cost structure.
But this week’s chart from Goldman Sachs shows that labor costs in China and neighboring Taiwan comprise a relatively low percentage of operating costs – typically less than 15 percent, and in some cases much less than that, with telecom in Taiwan being a notable exception at more than 20 percent.
Higher wages and an appreciating yuan together stand to create a double benefit for Chinese workers in terms of purchasing power. This is consistent with Beijing’s focus on promoting domestic consumption.
Some coastal Chinese companies may opt to relocate their production inland, where wages are lower, and some may be able to pass along at least some of the costs to their customers. It’s also possible that China’s tight labor market could loosen next year because the 2008 stimulus is scheduled to end. A rise in unemployment could put a damper on wage hikes and take some momentum away from labor activism.
None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of 3-31-10.
An Expert’s View on Yuan Appreciation
June 22, 2010
Global markets got a nice lift on news that China will allow gradual appreciation of its currency against the U.S. dollar.
But those who closely watch the issue are emphasizing the word “gradual,” as in “don’t expect too much action too soon.”
CLSA Asia-Pacific Markets, the influential Hong Kong-based brokerage, added its analysis to the broader discussion in a conference call. Here are a few of the key points, both short-term and long-term:
- While actual appreciation will be slow, Washington will be happy with this move because it breaks the yuan-dollar valuation peg in place since July 2008.
- A more expensive yuan may raise the price of Chinese products overseas, but this impact will likely be offset by the fact that China will still be the low-cost producer for a wide range of products popular in Europe and the U.S.
- One of the most significant impacts may be that this move provides a long-sought entry point for overseas investors to return to China. Asset prices should benefit, particularly share prices. Capital flows into real estate will be watched closely – if property attracts too much money, Beijing will respond decisively to cool things down.
- Emerging markets overall stand to benefit from higher capital flows as global risk appetite increases.
- Over the long haul, China will be become a more inward-looking economy, with more focus on domestic development rather than the export sector. Given China’s scale, “this has the potential to be game-changing,” says Eric Fishwick, CLSA’s top economist.
We have long been bullish on the China domestic growth story, which has increasingly been driven by the rapid rise of the country’s middle class and Beijing’s recognition that expanding and improving the nation’s infrastructure is vital to internal prosperity and global competitiveness.
Appreciation of the yuan stands to impact both by boosting the purchasing power of Chinese families and reducing the cost of copper and other dollar-denominated commodities needed for public projects.
Net Asset Value
as of 09/08/2010
- Global Resources Fund
PSPFX $8.78 +0.05 - Gold and Precious Metals Fund
USERX $17.44 +0.03 - World Precious Minerals Fund
UNWPX $20.18 -0.01 - China Region Fund
USCOX $8.61 -0.02 - Eastern European Fund
EUROX $9.11 +0.13 - Global Emerging Markets Fund
GEMFX $8.17 +0.08 - Global MegaTrends Fund
MEGAX $7.71 +0.04 - All American Equity Fund
GBTFX $20.02 +0.09 - Holmes Growth Fund
ACBGX $16.04 +0.15 - Tax Free Fund
USUTX $12.58 -0.01 - Near-Term Tax Free Fund
NEARX $2.26 -0.01 - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change