Dave Malhotra

Choosing A China Fund

I'm thinking of shorting CAF and going long either FXI or GXC. I want to play the gap between the mainland shares and the HK shares. Do you know of a better way of doing this?

Is China's Renminbi Undervalued?

Here is the key excerpt from the Commission report related to this article:

China Manipulates its Currency to Gain a Trade Advantage

China’s policies on trade and investment depend directly on the
government’s strict control of the value of the renminbi. Rather
than allow the nation’s currency to seek its own value in the international
currency markets, the People’s Bank of China dictates the
value of the renminbi and allows only small fluctuations. The central
bank requires that dollars entering the country be traded for
renminbi at a rate of about 8 renminbi to one dollar. By artificially
setting the renminbi at a value that most economists believe
amounts to a 15 percent to 40 percent discount against the dollar,
China provides its exporters with an equivalent price discount.
This practice violates both the letter and the spirit of the rules of
the WTO and the International Monetary Fund, which prohibit the
manipulation of currency values in order to secure a trade advantage.
This practice harms U.S. companies in a variety of ways and distorts
the trading relationship between the United States and
China. The policy attracts foreign investment to manufacturing in
China by automatically discounting the purchase price of Chinese
land, machinery, construction costs, and manufacturing inputs. The
exercise also puts competing U.S.-based manufacturers at a disadvantage
by making their exported products more expensive to
Chinese consumers. American small and medium-size enterprises
are particularly disadvantaged by having to compete for U.S. market
share with Chinese exporters who enjoy the subsidy of an artificially
undervalued renminbi. Smaller U.S. companies often don’t
have the cash, credit, experience, or willingness to shift large
amounts of capital abroad. So many of the smaller U.S.-based manufacturers
find themselves competing for American customers with
the large multinational corporations now producing at a discounted
rate in China.
This practice is ‘‘export-led growth with a vengeance,’’ according
to C. Fred Bergsten, president of the Institute for International Economics.
China’s surplus, according to Bergsten, ‘‘is an off-budget
job and development subsidy which enables them to under-price
their products in world markets, and thereby enables them to export
some of their unemployment to the rest of the world.’’
This emphasis on export earnings puts Chinese citizens—although
not the companies—at a disadvantage. The standard of living
of Chinese citizens is below what it would be if Chinese firms
produced goods for domestic consumption. Additionally, because
the Chinese government has been dismantling the social safety net
previously provided by state-owned and state-controlled companies,
Chinese workers must now save money for their retirement and
health care; pension plans and health insurance cover less than 20
percent of the population. Expanded government programs in such
areas as education and health care could allow Chinese workers to
save less of their income and to consume more, leading to more domestic-
led GDP growth. Instead, government and business savings,
as well as household savings, have been on the rise.
A secondary effect of China’s policy of currency manipulation is
the huge and growing trade surplus accruing between China and
the rest of the world. China now enjoys the largest current account
surplus in the world, a position held by Japan until 2006. That
surplus has helped push Chinese foreign exchange reserves beyond
$900 billion and on a path to break the $1 trillion mark this year.
If China were to allow its currency to move toward a market-driven
level, many economists expect that the growing imbalances would
decline. If the dollar and other currencies decline in relation to the
renminbi, investing in China would become more expensive for foreigners,
as would the purchase by foreigners of Chinese raw materials,
parts, machinery, and other inputs. This would lead to less
foreign investment in China relative to other destinations. After a
period of adjustment, it is reasonable to assume that China’s trade
surplus—and the trade deficit of the United States—would decline,
although few economists have undertaken the empirical research
necessary to quantify the dollar estimate of this decline.
The U.S. Treasury Department has argued that it would be in
China’s interest to allow the value of the renminbi to be set by
market forces rather than central government fiat. China has
begun to acknowledge that its projected 11 percent GDP growth
rate this year is not sustainable and has taken some steps to cool
the economy. For example, Chinese authorities have issued tighter
banking regulations in an effort to reduce speculation in commercial
and industrial real estate. Authorities are increasingly concerned
that too few people in China receive benefits from an export-
led boom dominated by foreign multinationals. The alreadysubstantial
economic inequality is increasing between the coastal,
urban elite and the rural dwellers who make up 45 percent of China’s
population. Because of China’s export-oriented industrial policy,
of which the renminbi valuation policy is a key part, many in
China cannot consume the very products that their factories are
producing. Meanwhile, cheaper imported goods are kept out of the
market by the policy of keeping the renminbi at such a low value.
In spite of these and other arguments that favor allowing the
renminbi to reach a more market-oriented value, Chinese economic
officials have said they prefer to emphasize stability.

www.uscc.gov/annual_re...

Is China's Renminbi Undervalued?

From the US-China Economic and Security Review Commision:

"China artificially lowers the value of its currency to maintain an
export-led trade policy. The State Administration for Foreign Exchange
accomplishes this by buying dollars and other foreign currency
in China at a fixed rate of around 8 renminbi to the dollar.
Only small fluctuations in the value of the renminbi are allowed."

"The Chinese government’s deliberate undervaluation of the
renminbi makes U.S. products more expensive to Chinese consumers
who therefore purchase fewer of them. Conversely, China’s
undervalued currency also makes Chinese products cheaper
in the United States, and therefore U.S. consumers purchase
more of them. The combination is a major contributor to the
record-high and still-growing U.S. trade deficit. The undervalued
Chinese currency harms American competitiveness and is also a
factor encouraging the relocation of U.S. manufacturing overseas
while discouraging investments in U.S. exporting industries."

www.uscc.gov/annual_re...

Is China's Renminbi Undervalued?

Ahh this might be a stupid question, but if the RMB isn't undervalued than why don't they allow it to freely float?

I have a hard time believing the NBER research. Wu Xiaoling, deputy governor of the People's Bank of China, has said that "the renminbi will more and more reflect market forces, but we will not have dramatic change in the short term." If she says the RMB will reflect market forces more in the future that means it ISN'T reflecting them now. Which means it is being artificially manipulated. And why would you manipulate something unless it wasn't to your advantage.

The Chinese are not playing by the rules.