The Yuan Dilemma; Stocks, Not Economy Overheating?

by: SA Editors

Late last month, a New York Sun journalist wrote an article entitled, "Wal-Mart Slowdown May Signal End to China Dividend." In fact, it's not only a Wal-Mart slowdown, it's also the U.S. government, led by Treasury Secretary Paulson that could kill the so-called "China Dividend." Last Friday, China's central bank announced it will sell 160 billion Chinese yuan ($20.45b) of one-year notes today to national banks in another attempt to prevent over-investment and overheating of the economy. ChinaYuan-USD-1yr-chart-12-08-06 ShanghaiComp-SP500-1yr-chart-12-08-06 While the central bank tries to slow bank lending and remove some liquidity, it avoided having to raise interest rates. Market participants, aware of the central bank's meeting, sent stocks lower by nearly 3% on Friday, but seem to like the middle approach by the central bank, as the Shanghai Composite rebounded today for a 4.15% gain (see accompanying charts: Shanghai Composite out-performance of S&P 500 and incremental yuan appreciation against US$). Paulson and company are set to visit China this week to put pressure on Beijing to let the yuan appreciate against the U.S. dollar. While this is seen as beneficial for U.S. manufacturers, it will make imports more expensive (the opposite is true for China), further eroding the China dividend. There are numerous implications of a stronger yuan and heated debate among economists and politicians rages on.
• Sources: The Wall Street Journal, New York Sun
• Related commentary: China: What to Do with Foreign Reserves At $1 Trillion and Counting?, McKinsey Survey: China Tech Moving Up Value Chain, Investing in China: Rapid GDP Growth Rates Indicate Prosperous Future
• Potentially impacted stocks and ETFs: Wal-Mart (NYSE:WMT). ETFs: PowerShares DB G10 Currency Harvest Fund (NYSEARCA:DBV), Euro Currency Trust (NYSEARCA:FXE), iShares Lehman Aggregate Bond (NYSEARCA:AGG), iShares Lehman 1-3 Year Treasury Bond (NYSEARCA:SHY), iShares Lehman 7-10 Year Treasury (NYSEARCA:IEF), iShares Lehman 20+ Year Treas Bond (NYSEARCA:TLT), iShares Lehman TIPS Bond (NYSEARCA:TIP)

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