Labeling China a Currency Manipulator (ETFs: FXI, PGJ)

Roger Nusbaum submits: I read in a couple of different places (Brad Setser & Marc Chandler) about the upcoming event where the US may label China a currency manipulator. In a way this is remarkably juvenile but it also could have serious consequences.

The relationship between US capital markets and China has become what it has become. Whether that is good or bad really does not matter. What matters is where we go from here. If China stops buying our bonds and sells all the bonds they already own the US economy will collapse. Of course China buying no more bonds and selling what they have would be disastrous for them as well and will not happen anytime soon.

What about a little further out than soon? That is possible. Our labeling China is a bad idea. They don't want to be labeled nor do they want their hand forced to take action they don't feel ready to take. Any long-term plan to wean off of US debt could be decided on tomorrow to be implemented over several years causing a slow erosion here at home. China is moving slowly to the let the yuan appreciate vs. the dollar. The further it goes up the fewer dollar they need to buy. The fewer dollars they buy, the fewer treasuries they will buy. Someone will need to take up that demand.

This is just one possibility. I would be surprised if any byproduct of the China situation turns out to be truly dire, negative and noticeable sure but not dire.

This is one reason why I have maintained Chinese exposure personally and for most clients. I own iShares FTSE/Xinhua China 25 Index (ETF: FXI) personally, and some clients own one of the Chinese oil companies. The yuan rising creates a little tailwind for Chinese stocks along the lines of what I wrote about yesterday.

Chinese stocks and ETFs are not for everyone. If you are interested in owning China I would advise 2%-3% unless you really want to add beta to your portfolio. I think the benefit of exposure to China is an important long-term theme for US investors. China is going to continue to evolve, economically, at a faster pace than the US. China's ascendancy does not have to come at the US's expense, but it will come.