Who’s Afraid of Big, Bad Inflation? Not China

U.S. policymakers think stronger yuan could rein in inflation, but Chinese have a different strategy in mind

   

This week, Chinese officials are in Washington, D.C., this week for their annual Strategic and Economic Dialogue meeting, and topping the list of discussion points between the world’s largest economic powers is the issue of China’s currency.

The United States has been pressuring China on the value of the yuan for some time now. And while Beijing has its own game plan when it comes to its currency, new trade data out yesterday may put more pressure on China to send the yuan higher.

Dramatic Surge in China’s Trade Surplus

China’s trade surplus swelled dramatically in April as a result of slower import growth and exports that kept powering ahead. The surplus widened to a whopping $11.4 billion in April, compared to a meager $139 million in March. This was a big surprise, as the average analyst expectation was for the trade surplus to come in around just $1 billion.

The government reported that exports in April rose 29.9% from a year earlier, down from March’s 35.8% increase. Imports rose 21.8%, down from the 27.3% increase in March.

Yuan Not as Undervalued as Many Think

To some, the latest trade data represents more supporting evidence for the thesis that the yuan is still significantly undervalued, and that it continues artificially boosting Chinese exports.

If you recall, we saw China revise its hard-line position on the yuan last June, letting its currency float in a range. Since then, the yuan has risen by about 5% against the U.S. dollar — or about 0.5% a month. And I think the latest trade data is likely to add to the pressure from Washington for China to allow faster currency appreciation. It also likely that the U.S. policymakers will try to persuade their Chinese counterparts that a stronger yuan is actually good for the economy, and could help China rein in inflation.

While I understand the logic here, I think the Chinese have a different strategy in mind when it comes to the value of their currency. The way I see it, the Chinese yuan is actually less undervalued than most people think. Because the Chinese created so much currency in 2009 and 2010, they now are facing the consequences via inflation. Yet this is actually part of the overall Chinese strategy.

Rising Wages Instead of Yuan Appreciation

Instead of letting the currency appreciate, China is choosing to increase wages. The Chinese prefer a model where people are making more and more money, and where economic growth data continues to surge. In return for this outcome, the Chinese are willing to put up with a bit of inflation.

Still, the recent move in the yuan has been higher, and some of you may want to know how you can make money with a rising Chinese yuan. One way is through CDs denominated in the Chinese renminbi, or yuan. For example, East West Bank offers yuan CDs with a one-year interest rate of 3.25%. Although this investment isn’t FDIC insured, it does offer exposure to the yuan’s appreciation and is an alternative to buying dollar-denominated CDs where the currency is actually depreciating.

With that said, I prefer to put my eggs in faster-moving baskets in the hottest emerging markets and investments that will benefit from China’s expanding economy.


Article printed from InvestorPlace Media, http://investorplace.com/investorpolitics/why-china-is-ok-with-rising-inflation/.

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