This should be good for HRCT
June 23, 2003
SPECIAL REPORT BY PORTER STANSBERRY
INTERNATIONAL LIVING CONTRIBUTING EDITOR
MAKE THE CHINESE PAY
A Single Call (or click) to Your Broker Can Put You Ahead
of the Biggest Currency Move of the Decade
Dear Investor -
There's a simple, and probably inevitable, way to make
several times your money--at the expense of the Chinese government.
This opportunity comes about because of a strange anomaly
in the world's currency markets. An anomaly that's made
China billions at the expense of the US economy...
When this anomaly comes to an end--and it must--some folks
are going to make a lot of money. Probably billions. It has
happened several times in the recent past.
*** This situation is setting up to be an even bigger
windfall than the British EMU debacle, when George Soros
made a billion dollars in one day.
*** The end of this anomaly will cause a huge shift in the markets, as large as the Thai devaluation or the collapse of the Argentine peso.
*** It will be bigger than the Russian default of 1998, or
the Mexican default of 1994.
*** That's why the richest investor in America is already
in this trade.
As you'll see, the opportunity here is so huge it's obvious
how to be on the winning side of this trade. What's not
obvious is how to get in this deal early--before other investors are even allowed in the market. That's how we can
play this safely--without leverage or much risk at all.
In fact, I can show you how to make money on this anomaly without even buying foreign currency, with just one call (or one click) to your broker.
Sophisticated trades don't need to be hard to execute.
WHY THE DOLLAR IS STILL STRONG IN CHINA
As you know, the value of the US dollar, as measured in
other currencies, has slipped a lot since the fall of 2000.
Investors in Euro-denominated bonds have done particularly well, for example. The Euro strengthened from $0.82 on the dollar to near $1.20--a 46% move.
Thus, just by holding Euros instead of dollars, you could
have made 46% on your money, not counting the interest and capital gains you would have made in the bonds. You weren't
subject to the risk of holding stocks, corporate bonds or private funds either. And that's why most currency traders can afford to use far more leverage than stock buyers. Currency traders usually leverage their position 10-to-1--amplifying their profits to 460%. You could have made a mint just by holding the right kind of currency in the bank.
And, what most investors don't realize is, you still
can...
Despite falling in value against every major currency in
the world over the last three years, the dollar remains unchanged against the Chinese yuan, which is one of the strongest currencies in the world. Strangely, the yuan exchange rate hasn't changed a penny since 1995. Thus, the big move higher in the yuan hasn't happened yet...even though we know it will.
In fact, China's currency must soon trade freely around the
world, as part of its World Trade Organization (WTO)
admission. This sets up an enormous opportunity to profit
as the yuan, like a rubber band stretched tight, will
surely move higher against the dollar when it begins to
trade.
Plus...I know how to get yuan assets now...before trading
even is officially allowed.
CURRENCY CHEATERS
Why hasn't the dollar fallen--yet--against the Chinese currency?
Because the Chinese government--as an economic
policy--keeps the yuan pegged to the U.S. dollar. The
yuan--for now--isn't allowed to strengthen versus the
dollar. This helps China's export economy and ensures that billions of dollars end up in China's state bank as currency reserves.
Specifically, The People's Bank of China now holds over
$316 billion dollars in reserves, which is the second
largest stash of US currency reserves anywhere in the
world. (Only Japan, with a much larger economy, holds more
US dollars.) The Chinese policy of aggressive currency debasement keeps the Chinese people in poverty, while enriching Chinese manufacturing tycoons and the country's political elite.
The Chinese debasement strategy began in 1995. Remember the
Asian Tiger economies, Singapore, Thailand, Indonesia etc?
They became wealthy by exporting goods to the United
States, following Japan's lead.
To muscle in on this trade with the United States, the
Chinese lowered the value of the yuan from 5 yuan to the
dollar ($0.20) to 8.2 yuan to the dollar ($0.12). This
stole 40% of the yuan's purchasing power, further
impoverishing the Chinese people. But it
also--instantly--made Chinese exports 40% cheaper on the
world market.
For example, let's say you were importing TV sets from Asia
in 1994. Good Taiwan sets cost $100, delivered to the
United States. Chinese sets cost about the same. Then, a
year later, in 1995, China suddenly devalues its currency. Overnight the cost of TV sets from Asia falls by 40%. TVs now cost $60--but only if you buy Chinese.
You can imagine the impact this had on the other economies
in Asia. In fact, the Asian currency crisis of 1997 was
spawned by the devaluation in China. And China continues to
systematically hold down the value of its currency, the
yuan, in order to make Chinese goods cheaper to export.
As a result of this policy, the Chinese government has garnered--unfairly--hundreds of billions of dollars in trade surpluses. In 2002 alone China garnered over $78 billion in trade surplus. China has literally been sucking money--and jobs--out of the United States for the last eight years.
Let me be completely clear about something...my problem
isn't with the Chinese people. They have as much right as anyone else in the world to sell their goods and earn money. I support free trade. But China's debasement policy ensures the People's Bank of China ends up collecting billions of dollars. It is cheating: this hard currency never makes it to the Chinese people.
Worse, this policy has a terrible effect on America. Look around your house. Your clothes, your electronics and your new furniture were probably made in China. Millions of America's best paying manufacturing jobs are now held by cheap Chinese labor in places like Guangdong Province. People there will work six days a week, for the equivalent of $85 dollars per month. They don't get vacations. And there are no pensions or health benefits.
How can China systematically devalue its currency?
Most of the world's currencies trade freely. The price of a
dollar, or a yen or the Euro, for example, is decided by thousands of major foreign exchange traders around the world. They price currencies by judging inflation rates, interest rates, economic growth, trade balances and productivity. Like other commodities, you can trade most currencies.
But not in China.
In China, only exporters are allowed to exchange yuan with
the Bank of China for dollars--and only at the exchange
rate the Bank of China decrees. Thus, the communist
kleptocrats who run China can decide at any moment how
cheap, or expensive, their currency should be. And they
keep it artificially low so that Chinese goods can be sold abroad, bringing in hard currency and building their billions in reserve.
Obviously though, a Chinese yuan should be worth a lot more
than $0.12 cents. Said another way, the dollar shouldn't be
worth 8.27 yuan.
WHY WE'RE SURE THE YUAN WILL RISE
The best way to judge the relative value of currencies is
by measuring what a US dollar will buy you in different countries. When currencies are trading for fair value, commodities across borders cost approximately the same amount. When a currency is over priced, commodities in that
country will be very expensive. And when a currency is undervalued, commodities in that country will be very cheap.
The Economist magazine makes this purchasing power
comparison on a regular basis, comparing the local cost of
a Big Mac around the world. The Big Mac is a convenient measurement because it's sold around the world and involves
a number of inputs (labor, beef, real estate, etc.).
On April 24th 2003, the Economist reported, "The yuan is
the most undervalued currency" in the world. A Big Mac in China costs $1.20, on average. In the United States the typical price is $2.40. In order for China's yuan to reach parity with the US dollar, the yuan would have to appreciate 56% against the dollar.
Or, said another way, because the yuan is kept artificially
low against the dollar, Chinese goods cost half of what
they should in America. China has been taking US jobs and collecting billions in US hard currency because it cheats.
This can't go on forever. So it won't.
In 2001, with much fanfare, China joined the World Trade Organization. And, as part of its application and membership process, China must allow its currency to "float"--to trade freely around the world. The People's Bank of China will no longer be allowed to solely determine
the exchange rate. The communists will no longer be allowed
to suck dollars out of America and impoverish their own
people.
As any sophomore economics student can tell you, the
exchange value of the yuan must rise. A Big Mac should cost
roughly the same, whether you're eating in Times Square or Tianamen Square. And when this "revaluation" of the yuan happens, you should have the opportunity to make a bunch of
money.
HOW TO PROFIT NOW
There are several ways you can profit on the situation.
The first way is the most obvious: be ready to buy as much
yuan as you can when trading in the currency begins. If
you've never traded a currency before, don't worry; there
are other ways to profit. Nevertheless, because the biggest
gains will go to currency speculators, I'm going to explain
how it works. It's not nearly as hard as most people
imagine...
Essentially all you're doing is trading cheap dollars for expensive ones. It's not complicated. But, for some reason,
even people who bought Internet stocks imagine that trading
currencies is "risky." The fact is, anytime you travel overseas...or even buy overseas products...you're engaging in currency trading of some type.
Imagine that you could go to a major bank, like Citibank or
Bank of America and deposit US dollars into a yuan account,
like you can with any other major currency. If you did that
today, you would get 8.27 yuan for each dollar you
deposited. Simple. So, if you put in a million dollars,
you'd have 8,270,000 yuan in the account.
(By the way, you wouldn't need a million dollars...or even
a thousand dollars to make this trade. With most currency trades, you don't even pay commission, in fact. So, you can
trade as little as $10 if you want to. I'm using a million dollars in my example because it's a big, round number that
illustrates clearly how you--or anyone else--can make money
in currencies.)
There's no risk that you'll lose your money (assuming the
bank doesn't collapse or something outrageous). It's just sitting in the bank. People make these kinds of transactions everyday--to go on vacation in a foreign country or to import products from overseas. There's nothing exotic about it.
Now, when China allows the yuan to trade freely, we're sure
its value will rise--because of its enormous reserves and
huge trade surplus, as well as the purchasing power parity analysis.
Let's say, just for example, the yuan strengthens back to
its pre-1995 exchange rate of 5.0 yuan to the dollar. You
still have 8,270,000 yuan in the bank. But, after the
currency rises, you're ready to take it out. Obviously,
when you take your money out of the bank, you'd want your
money in US dollars.
Remember, you have 8,270,000 yuan in the account. But the
yuan is now trading for 5 yuan to the dollar, not 8.27
anymore. So...you divide 8,270,000 yuan by 5 (the new
exchange rate) to figure out how many dollars you have
now.
You'd get back $1,654,000 dollars.
You'd make over 65% on that transaction--without using any leverage at all. And, like I said, most currency speculators--especially in such obvious, cut and dry situations like this--employ a lot of leverage. Ten times leverage isn't unusual. Using that much leverage in our scenario makes you $6.5 million dollars on a $1 million investment.
See why the world's richest investors trade currency? See
why a currency trading at an artificial 56% discount is
such a big deal? See why people are going to be buying yuan
when it starts freely trading?
WHEN WILL THE YUAN TRADE FREELY?
There's only one catch.
No one knows yet when the Chinese will allow the yuan to
float. Thus, it's unclear when you would be able to open a yuan-denominated account. All we know for sure is yuan convertibility will happen sometime between now and 2008, when China's introductory period into the WTO expires.
But...we have good reasons to suspect yuan convertibility
will come quickly.
First, on Monday June 16th, US Treasury Secretary John Snow
made the first official U.S. statement encouraging China to
float the yuan. "We understand that the Chinese government
is interested in moving toward market-based flexible
exchange rates and that is something we support."
You have to read between the lines here. The US position
for years--even during the Clinton presidency--was China
should float the yuan. Now the size of China's trade surplus--up another 34% this year--has become crippling to the US economy and Bush faces re-election in 2004.
There's an interesting historical context to the China
currency problem too.
In 1971 Japan was the problematic Asian import economy with
a fixed and thoroughly debased currency. Richard Nixon,
then facing his own slowing US economy and re-election, pressured Japanese officials to float their currency, the yen. It immediately rose 17% and continued higher the rest of the decade. The same should soon happen with the Chinese yuan. In fact, Sun Bae Kim, an economist for Goldman Sachs who has studied the same figures you've seen here says the yuan should move higher in the next 12 months.
And, one more thing to note. On July 1st China's Hu Jintao,
the new Party General Secretary--essentially the political
head of China--is planning to give a big speech. July 1st
is Party Day in China...so it's not unusual for Hu to be
giving a speech. But...it's rumored that among the announcements he is planning to make will be a new constitutional amendment guaranteeing the right to private property. We'll see. But, if this does happen, it would undoubtedly be very bullish for Chinese assets and the Chinese yuan.
That's why I'm advising people, if at all possible, to establish their yuan positions prior to July 1st. I think it is at least possible that Hu would announce plans to float the yuan. If so, the price of Chinese assets will probably soar.
Meanwhile, of course, there's no apparent way to buy yuan.
Or is there?
AN AMAZINGLY SIMPLE WAY TO BUY YUAN NOW
What if I told you there is an easy way to buy
yuan-denominated assets right now, legally and before convertibility begins? Knowing how undervalued Chinese assets are...and how much they're likely to rise when the yuan begins trading, would you be interested?
Well, there is a legal way to do it.
Fortunately, it is also easy and cheap to make the
transaction. In fact, you can do it through any discount
broker in the United States...
And what if I told you that because of a special loophole, these investments are allowed to convert yuan to dollars right now? What if I told you these Chinese assets actually
pay out US dollar dividends?
Both statements are true. There's a backdoor way into
buying yuan convertible assets. Sounds risky though,
doesn't it? Well it's not. Your money won't even leave the United States...
You see, while I fully plan on making a ton of money when
the yuan begins to trade against the dollar, I recognize
that I might not ever have the opportunity to exchange my dollars for yuan at the official 8.2 exchange rates. The market might move so fast that I'd never get that good of a
price if I wait to buy yuan when trading officially
begins.
I don't plan on playing fair. I want every advantage I can
get. And I think you should have these advantages too...especially because they're easy to use if you know about them.
I know this might sound a bit far out to you--most American
investors have never bought a foreign stock before. But
yuan convertibility, and the rise of the yuan as an
important regional currency, will be one of the biggest
stories of 2004. Some people will undoubtedly make a lot of
money on these changes.
My plan therefore, is to get a leg up on everyone else. I
want to accumulate some yuan assets now, assets that could skyrocket in dollar terms when trading in yuan begins.
Of course, I don't relish taking on the risk of holding
Chinese assets. I don't want to invest in China at all per
se. Let other adventurous risk takers make that gamble. All
I'm doing is making a bet that the yuan is worth more than $0.12 cents. And that when trading in the yuan is allowed, the hundreds of billions the Chinese have racked up won't stay in China for long.
Also, I know this for sure: the US dollar is falling. And
the yuan is the most likely currency in the world to
appreciate against the dollar in the next few years because
of China's exchange rate policy, cheap labor and massive foreign reserves.
My plan to make a killing on the impending convertibility
of the yuan is to buy up high yielding Chinese assets--safe
assets--that can pay me US dollar dividends today. This is
how I can buy yuan convertible assets even before the yuan
is "officially" convertible.
I believe this strategy will more than double my investment
between now and when yuan trading begins. By buying yuan
assets ahead of yuan convertibility, I stand to make
windfall gains.
If you would like to know about the three investments I'm making right now--you can buy them all inside the United States--and more about my strategy to trade the yuan when it floats, I have an unusual offer to make you.
As most of you know, before I began my growth stock
newsletter (Porter Stansberry's Investment Advisory) in
1999, I was an emerging markets analyst for the Strategic Group. In that capacity I studied all of the main sectors of the Chinese economy, traveled extensively throughout China, studied several hundred Chinese equities and became familiar with how people really make money in China.
I even wrote a small book on all of the Chinese stocks
trading in New York. Back then, only two out of eight were worth buying. Since then though, several high quality assets were listed. In fact, Warren Buffett himself announced Berkshire Hathaway's first foreign investments included such Chinese assets. I believe Warren sees the same undervalued potential that I do. And, believe me, if these investments are safe enough for Warren Buffett, they're safe enough for any investor, no matter how risk averse.
Again, my plan is only to make money on the surge in the
yuan. I don't care about investing in China at all--in
fact, I wouldn't make this investment except for the
obvious potential for huge currency exchange gains. These stocks are just a way for us to play the currency ahead of the yuan's convertibility.
I've found three solid investments that are low risk, pay
good dividends and which should benefit dramatically from a
stronger yuan. In short, I'm confident I can double my
money before trading even starts in the yuan by scooping up
these Chinese assets on the cheap. And, today, it's the
only way to buy Chinese yuan assets that yield US dollar dividends.
Meanwhile, I plan to use my extensive China contacts to
prepare for trading in the yuan itself. The market will
move very quickly, even on the first day of trading.
Remember: Soros made a billion dollars in just one day. If
you miss the first day of yuan trading, you may miss out on
the single best money making opportunity of your lifetime.
DO THIS BEFORE JULY 1ST:
Here's how I can help you.
First, read my new CHINA STRATEGY REPORT.
You'll get the full scoop on the three Chinese companies
I'm buying today. Again, these are safe assets that provide
a good yield. They're already moving higher, but have a lot
further to go. You see, what we're really doing is buying
up yuan-denominated assets while we can still get them at
the official exchange rate. When the yuan begins trading,
these assets should see book values--denominated in
yuan--soar in US dollar terms. We should make 50%-70% on
our money based on currency appreciation alone. Meanwhile,
we have the advantage of being early and earning solid dividends (paid in US dollars).
Next, you'll also get my CHINA STRATEGY REPORT UPDATE.
I'll keep you posted on all the yuan news: when it should
begin trading, its current purchasing power parity value
and how we can position ourselves to be among the first
buyers of the currency when it floats. I'll keep you fully
informed, via email, and you'll get complete and timely instructions on how, when and where to trade the yuan when trading starts. I'll update you on our current investments each quarter--for as long as it takes--until the yuan begins trading. And, as events warrant, I'll send you additional updates as necessary.
You'll never have to buy anything from me again. No
renewal. No maintenance fee. Whether it happens in 2004 or beyond, I will continue to follow this story closely for you. And, I'll keep you in high yielding, yuan denominated assets that will position you for possible windfall gains when yuan trading begins.
To summarize, the Chinese government has taken billions of dollars out of the U.S. economy by regulating the price of the yuan. The world's currency traders have the opportunity
to take all of this money back from the Chinese when the
yuan begins to trade freely around the world.
With my contacts and knowledge of this situation, I can position you alongside the world's most sophisticated traders. I can give you the opportunity to make windfall profits as the yuan moves towards convertibility.
Or...you can do nothing at all, while the US dollar
continues to lose value.
The wise course is obvious: make some very conservative investments ahead of yuan convertibility. Protect yourself from the weakness in the dollar. Make the Chinese hand back
over their ill-gotten gains when yuan convertibility
comes.
And, whether you decide to take my advice on this situation
or devise your own strategy, make sure you act before July
1st. The political pressure on China's leadership has been growing and China's leaders rarely make public appearances.
Any comments Hu makes about the future of convertibility
could result in a huge spike in our investments. Remember:
our main advantage right now is the opportunity to act
ahead of convertibility--don't give away this advantage
with complacency.
To subscribe to my new service--the China Strategy
Report--for a one-time fee of $250, just click the link
below.
pirateinvestor.com
Best,
Porter Stansberry
Editor, Investment Advisory
Contributing Editor, International Living |
