Today, the wider yuan trading band will begin to challenge Chinese economies trying to hedge against currency risks atop easy monetary policies in developed nations.
The People's Bank of China has undoubtedly prepared a compromise on the yuan's daily floating band, taking signals from western economies about currency manipulation on free trade. At the same time, the U.S. economy is also coming under significant pressure from the investor community about the overall strength of the U.S. dollar, after a series of accommodative policies were set in place by the Federal Reserve against the threat of continuous deleveraging within the financial community at the peak of the credit-crunch back in 2008.
Now the question of sustainability for China's exporting business comes into question, as the yuan's daily floating band at the moment makes Chinese goods cheaper relative to U.S. goods, which increases demand for Chinese exports and decreases demand for U.S. goods - creating a larger U.S. trade deficit. As China has come under considerable political pressure to "de-peg" the yuan and allow the currency to float freely over capital exchange markets, the issue of China leading world trade as the largest exporter and second largest importer on the planet is now center stage.
China said its economy grew 8.1% in the first three months of 2012, as the Chinese economy was hit by weaker demand in the nation's key export markets. This figure is well below the 8.9% growth recorded in the last quarter of 2011. As Wall Street analysts continue to predict that the world's second-largest economy will grow and is expected to rebound in the second half of 2012, as Europe's economic outlooks rises and existing loosening measures for the yuan kick in, U.S. export to China is increasing six-fold. The United States's relationship with China is becoming increasingly complex. China not only owns a significant amount of our U.S. national debt, but now China supplies most of the consumer goods that we buy today and is also becoming the largest U.S. consumer of goods.
According to a report out of the US China Business Coucil, between 2000 and 2011, U.S. exports to China increased 562% while exports to the rest of the world increased a meager 80% within the same period. China is now the third largest U.S. export market, and U.S. exports to China continue to expand rapidly. Thirty U.S. states now count China as one of their top three export markets and 25 U.S. states exported more than $1 billion to China in 2010, with export categories reflecting a broad range of categories to include agriculture products, computer & electronics, chemicals and transportation equipment.
U.S. investors continue to gather relevant data about the expanding manufacturing sector here in the United States, as the manufacturing sector here in the U.S. expanded again in March, as well as the U.S. factory sector specifically expanding for a 32nd consecutive month. The production index here in the United States is said to have increased 3 percentage points from February's reading of 55.3 percent to 58.3 percent, which signals that global business continues to be robust and driven by a healthy demand for exports and relatively stable raw materials. The campaign for "Made in the USA" continues to enlighten many U.S. investors pondering about increasing the manufacturing base here in the U.S., to include foreign companies such as Samsung. Excellent foreign cars at the moment are currently manufactured here in the United States, the likes of Toyota (NYSE:TM) and Honda (NYSE:HMC). Ask yourselves, what would global business succumb to if Samsung announced all of its PC tablets were to be manufactured in the U.S.?
For years, retail investors here in the United States have been subject to making huge bets overseas on the manufacturing of consumer goods, to include Ralph Lauren (NYSE:RL) and Johnson and Johnson (NYSE:JNJ), to keep their business costs at these major corporations at a minimum. Now the tables are set to turn in 2012, as exports to China out of the United States are set to continue this uptrend and China continues its support for a stronger yuan. The U.S. retail sector continues to be an attractive play for U.S. and global investors, as the fundamentals driving the current financial recovery led by the United States also set the U.S. retail industry worldwide to outperform globally against all other sectors within the world economy.
Chinese officials are now making plans to address the issue of China's growing domestic demand, and continue to make China a more consumption driven economy. China in a few years is said to become the world's largest importing nation, as China's current account surplus has shrunk from 11 percent of GDP in 2007 to 2.7 percent last year. China is making plans to cut import tariffs later in 2012, as the most important policy for China at the moment is to boost the role of Chinese domestic consumption. The ultimate role for the U.S. in setting market precedence moving forward, to include the U.S. growing its exporting business in the midst of a financial recovery in the stock-market also lead by the United States, is all U.S. exports becoming increasingly affordable for the growing middle classes among developing nations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.