How To Profit From Chinese Vow To Maintain Exchange Rate Policy

Includes: FXI, FXP, HAO, YINN, YXI
by: Benzinga

By Daniel James Hayden IV

According to reports in the Chinese media over the weekend, Chinese Premier Wen Jiabao vowed to keep China's exchange rate with the United States dollar stable in order to help China's exporters. The remarks from the Chinese Premier were probably aimed at U.S. lawmakers as much they were meant for Chinese exporters.

China has been accused of manipulating its currency for years in what critics say is an effort to make Chinese exports artificially cheaper than competing products from other countries. American critics of Chinese monetary policy have been particularly vocal, with some saying that the artificially low exchange rate has cost America millions of jobs.

Last week, the United States Senate voted in favor of punishing countries that manipulate their currencies to the detriment of American businesses. However, the vote was mostly symbolic because the House of Representatives is unlikely to pass the measure. Still, China's reaction to recent talk in the United States Congress of punishing countries accused of currency manipulation has been fierce.

Many Chinese officials have said that such a move by the United States Congress could set off a trade war between the world's two biggest economies. Chinese critics of the move to punish currency manipulators say that instead of blaming China for the United States' economic problems, American leaders would be better off addressing America's own economic problems, such as its low savings rate and dependence on debt.

The move to punish currency manipulators comes at a sensitive time in China. Although China still boasts rapid economic growth, the country has also been dealing with inflation rates so high that many Chinese feel that they are not benefiting from their country's booming economy.

With the cost of living on the rise, many employers have been forced to increase wages. China's exporters have been complaining that rising costs of materials and labor have hurt their profit margins.

It was in response to this situation and the tough talk from Washington that Chinese Premier Wen Jiabao said that he would offer more support to the country's exporters, including "a basically stable exchange rate," according to China's official Xinhua News Agency.

The Chinese Premier's vow not to buckle to international pressure to let the value of the Chinese yuan appreciate is good news for Chinese exporters. For those who prefer the risk reduction that comes from buying a wide range of Chinese stocks instead of just a few individual stocks, there are several ETFs to choose from, such as the iShares FTSE China 25 Index Fund (NYSEARCA:FXI), Guggenheim China Small Cap Index (NYSEARCA:HAO), and the Direxion Daily China Bull 3x Shares (NYSEARCA:YINN).

While China has been able to resist much of the pressure to let the value of the Chinese yuan rise, it could become more difficult to do because so many developed economies are facing recession. With many European countries struggling and a few like Greece facing possible defaults, there will be more international pressure on China to abandon its long held currency policies.

If China finally lets the yuan fluctuate freely, the country's economic growth could slow. If that happens, ETFs like the ProShares Short FTSE China 25 (NYSEARCA:YXI), ProShares Ultrashort FTSE China 25 (NYSEARCA:FXP), and the Direxion Daily China Bear 3x Shares (CZI) could move higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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