So here we are in March, the 3rd month of this 2010 year (funny how time flies eh?) and the Dow has recovered most if not all (during some of the intradays) of the losses it chalked up during the first two months. A new jobs bill was signed early last week (to the tune of $140B!!! WOW). TOYOTA as well as other car manufacturers (well...actually really just Toyota) are under the microscope of many opportunists and interests (it is a shame that they did not fix it right away or at least address the problem while it was still in-house. In contrast - I have heard about this problem while I was still in the car business back in early 2008!). Healthcare Reform has reared its ugly head again (ugly? because the market really do not like it as it seems to trade off every time it is mentioned in the mainstream media..so unless you are short on the market- then yes, its ugly). Unemployment remain high, even though it managed to shed a few tenths of a percentage of that staggering 10% (Personally, maybe we have set the bad news so high for this data to make sure we do not get further depressed). And of particular relevance - the pressure of the United States Senate on China to realign its currency the Yuan Renmibi (CYN).
Let me try and be as objective as I can in analyzing why this is a BIG ISSUE (as long as it is in the headlines) when it comes to investing in Chinese ADR and any other equities or investments revolving around the CYD. First, realigning the Yuan would more than likely reveal the Chinese currency to be higher in value that it currently is being traded in the FOREX market. As of today (March 16th 2010), 1 CYD trades for 0.146499 USD. So a realignment of the Chinese currency as hinted by the U.S. Senate push to influence the U.S. Dept. of Treasury SHOULD probably be worth more in the World Market. This is NOT GOOD if you are investing in Chinese ADR's (like I am) since essentially the local currency these companies are using would essentially lose value.
On the other hand - China for the most part has been able to deflect most of the criticisms from the world and the USA. For example - the widespread belief earlier this year (and some still very much believe) that China was headed for a housing (lending) bubble that we experienced here domestically in the last 10 yrs. So, the government in China raised its "reserve" limits on its lending institutions to help avoid a similar crisis in their own country. Some are saying now that it can only soften the blow for what appears to be inevitable. Similarly - now they are faced with the potential of the attention of the US Senate in calling out their currency as manipulated and undervalued.
This criticism has actually been around for a while...it just happens that we are now seeing it more often on the mainstream media. Some would argue that this is because it is election year and the Dems in Congress are really trying to move the public's attention on the existing historical high unemployment and lack of jobs and the financial trouble that many are still experiencing on a day-in, day-out basis. Or the huge trade deficit we have with China. Or possibly the HUGE amount of debt we have TO CHINA. In all cases, China has responded with saying that it does not manipulate its currency and USA should deal with their own problems instead of trying to push the blame on to other countries. "The country's managed floating exchange rate system, in place since July 2005, is market-based, said Chinese Commerce Ministry spokesman Yao Jian" last Tuesday.
At this point - it is all just steam as the push to the Obama Administration from the US Senate has just started (in the tune of 130 US Senators). Whether or not Obama will give the Senate a willing dance partner - public opinions will tell down the road. There are probably already Gallup Polls being conducted to determine whether or not this issue is a deal-maker or breaker in the eyes of the voting general public. If it is found that it is something that can affect the American Voting Psyche - then I would be very wary of investing in Chinese stocks for the long-term (Shorts, you hear this?)
During the late 1970's and early 80's - there was a huge backlash on some foreign made products (remember the stigma attached to "Made in Taiwan" or even the criticisms of Japan made vehicles?). There were movies and sitcoms and songs that became generational hits from this time infusing this sentiment. Similarly, many US Based companies flourished during this same period.
Could this be something similar unfolding now with the CYD? I don't know myself but would be very interested to find out as I have been focusing on investing in China-based stocks.
BD
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