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May 03, 2005
Will the yuan revalue?
Although we’ve heard it a lot over the past year or two, the voices are getting louder and louder. There now seems to be a distinct possibility that the Chinese yuan will revalue later this month from 3% to 5%. At least those are the noises coming out of China.
The following information comes from Tom Dyson, reporter on The Rude Awakening, young sister publication of our syndicated Daily Reckoning...
"That's the scuttlebutt from several Chinese traders, CEOs (party connected) and a couple of fund managers," he responded when pressed for his source moments later. "It makes sense - there is absolutely no sense of urgency over here, but they are seeing some pressure from the threat of tariffs on textiles. It will not be some huge revaluation - 5% would be high - 3% more likely to pacify 'the West.' Take it for what it's worth, if it happens, you will have the inside track on the number."
Certainly,looking at the spreads in the forward market, one has to conclude something's going on. The banks trade currencies at either a spot rate or a forward rate. The spot rate is the rate you get for changing your currency immediately, while the forward rate is the rate you get for agreeing to change your currency at a certain point in the future.
One month ago, the yuan was trading at a 70-point premium in the 1-month forward market. Recently, however, that premium had increased to 400 points. One way of stating this is that the market is predicting a 400-point move in the exchange rate – from 8.2765 yuan per dollar to 8.2365 - imminently. Looking 12 months ahead, the premium is closer to 4,000 points, implying an exchange rate of 7.89 yuan to the dollar, or a 5% appreciation.
But sources say that we're still a long way from a floating renmimbi, and if they do anything, it’s likely they'll simply move the peg a notch or two - nothing dramatic, but just enough to appease the politicians for the time being.
Now lets take a look at some of the fundamentals from a social perspective. Chris Mayer, Fleet Street editor, has been researching what sociologist Thorstein Veblen dubs "China's new leisure class" – a burgeoning Chinese middle class with an appetite for travel and tourism, and a market segment that will grow exponentially as the yuan floats higher...
"This trend will have enormous investment implications as the world caters to the Chinese and their spending patterns. I have written about the growing number of Chinese tourists before, and my latest investment idea is a play on the idea of this new leisure class. It doesn't take a lot of imagination to picture how traveling Chinese with money burning holes in their pockets will benefit hotels, for example."
In 2003, according to the World Tourism Organization, some 20 million Chinese traveled abroad spending $48 billion dollars in the process. The WTO project 13% annual growth in Chinese tourism over the next decade and by 2020, some 100 million Chinese will travel abroad each year for their holidays, making China the fourth largest source of outbound travelers, they say.
"Increasing affluence in China, and the emergence of a large middle class, will help the travel industry generally. Interestingly, the Chinese like to gamble.In 2003, 90% of Chinese travelers to the United States visited Las Vegas, so you can see there are many ways to make money off Chinese prosperity without the perils of investing in China."
In my next post, we’ll be taking a look at how you can get a foothold in the “new economy” of China without the risks of direct investment.
In the meantime, protect your dollar assets and learn how the foreign exchange markets work at the same time. Here’s a good place to start: Forex Trading Systems
Posted by Tony at May 3, 2005 02:40 PM