Interesting article in the WSJ on how to play a rising yuan, presuming that China allows the yuan to float.
Just my opinion, but I think any such plays are extremely premature at the moment.
Before China can float the yuan, they must resolve the income disparity between the large coastal cities and the inland cities and villages. If China were to float their currency prematurely, the income disparities might never disappear and the government would risk (in its entirety) the realized gains in the larger coastal cities.
The Chinese banking system, in particular the inland banks, are just flooded with bad loans, with no current controls in sight, meaning unpaid debt will continue to accumulate at inland banks (most of them state banks) until such time as equitable incomes can be realized in the inner hinterlands. Floating the yuan now could jeopardize the relatively shaky instability of these unprofitable inland state banks.
While it may be true that waiting for China to resolve its problems before committing any investment funds over there could cost foreign investors a few percentage points in eventual profits, not waiting for a resolution could be far costlier in terms of loss of investment capital or loss of opportunity to invest profitably elsewhere.
As always, the investment advice here should be to proceed with caution...
online.wsj.com
The China Bet: How To Play a Rising Yuan
Despite Risks, Ordinary Investors May Benefit If China's Currency Is Allowed to Begin Floating
By JEFF D. OPDYKE and JANE J. KIM
Staff Reporters of THE WALL STREET JOURNAL
To investment pros around the world, China is home to the world's most undervalued currency.
Now, China is coming under growing pressure to let its currency, the yuan, rise against the dollar. If that happens, investors who own yuan-based assets -- including currency, mutual funds and stocks -- will make out like bandits.
The yuan, also known as the renminbi, has been pegged at 8.28 to the dollar since about mid-1997. China keeps the rate artificially low to make its manufactured goods cheaper in overseas markets. It's a big reason why China is running a huge trade surplus with the U.S., a hot political issue with American manufacturers still trimming jobs. And it's why professional investors have been pouring money into Chinese stocks while expatriate Chinese are increasingly snapping up real estate, stocks and bonds in their home country.
All this raises the question of whether ordinary investors should consider trying to profit from a rise in the value of the yuan -- and, if so, whether there are relatively safe vehicles to do so.
Treasury Secretary John Snow went to Beijing last week to argue that the yuan be allowed to climb against the dollar. China rebuffed him before he even arrived. But over the long run, China is likely to change its tune. Two years ago, China agreed to float the yuan by 2008 as part of its acceptance into the World Trade Organization. And many traders expect China will act sooner.
China won't likely float the currency at once, since doing so would have a dramatic and negative effect on the economy. The most likely course: China gradually expands the range over which it allows the yuan to trade against the dollar. Just about everyone agrees when that happens, the yuan will instantly rise to the high end of the band. No one is certain how wide China might allow the band to stretch initially, or how soon it might expand the band or when China might decide to float the currency fully. But some see China making a move as soon as next year.
Suppose the yuan climbs to five to the dollar, representing a roughly 40% gain, which many pros see as likely if the currency is set free. The result: A dollar invested today would be worth $1.66. Even if it takes China until 2008 to fully float the yuan, that represents a roughly 14% average annual return.
"The revaluation is coming. It has to," says Jim Rogers, a U.S. investor who specializes in overseas markets. He owns Chinese stocks.
Already, money is beginning to pour into China. Through the end of July, nearly $200 million has flowed into mutual funds focused on the China region, compared with a $65.8 million inflow for the year-earlier period, according to Lipper, a market-research firm. Nearly all the inflow occurred from May to July as speculation grew that the yuan would be revalued.
Betting on a yuan revaluation has its risks. Chinese officials could decide that a stronger yuan will hurt its economy too much and postpone revaluation. China periodically argues that the yuan could depreciate if allowed to float, though most traders don't take that seriously.
Even if the revaluation occurs, an investment could still go awry. China, or Asia in general, could stumble economically, as happened a couple of times in the 1990s. Corporate reporting standards aren't as rigorous in China as in developed nations, and many of China's financial institutions are troubled.
Interest in the yuan comes as Wall Street increasingly looks abroad. For much of the 1990s, owning foreign assets wasn't a great play because the U.S. economy was on a roll and the dollar was strengthening. Today, the dollar is weaker and foreign currencies as well as overseas stock markets are gaining favor.
There are a number of ways to play the yuan. You can't own the currency directly because of controls imposed by China. Everbank.com, which offers foreign-denominated savings accounts and certificates of deposit to U.S. investors, gets around this by structuring its yuan deposit accounts around so-called managed currency contracts -- an agreement to buy or sell the currency at a certain price in the future. Minimum investment is $10,000. In the two months that Everbank.com has offered yuan-denominated deposit accounts, more than $12 million has flowed in.
U.S. investors also can benefit from a revaluation by owning Chinese stocks or China mutual funds. If the yuan escalates against the dollar, the value of those investments will rise in tandem. Of course, investors should look for growth and not just currency returns.
More than 30 Chinese companies trade in various U.S. stock markets, typically as American depositary receipts, which represent ownership in a foreign stock. Many are big firms, such as Aluminum Corp. of China and utility firm Huaneng Power International. Others are small and trade infrequently, adding to their risk.
Chinese stocks, which were depressed earlier in the year partly by fears of severe acute respiratory syndrome, have been on the move lately. The Bank of New York China ADR Index gained 6.95% in August; year-to-date, the index is up 32.24%.
For most investors, owning China-focused mutual funds is the easiest way to go. Funds with big positions in China include Matthews China, Guinness Atkinson China & Hong Kong and AllianceBernstein Greater China '97. Several closed-end mutual funds also offer entree into China, including the Templeton China World fund.
Write to Jeff D. Opdyke at jeff.opdyke@wsj.com and Jane J. Kim at jane.kim@dowjones.com
Updated September 10, 2003
KJC |
