China Yuan Currency Manipulation, Free Trade versus Fair Trade

By: Jim_Farrish

The fantasy of forcing China to float the yuan against the dollar is building steam. There have been attempts to persuade the Chinese government to this end, but they have not listened, nor do they really intend to act. The yuan has floated higher by 1.8% over the last five weeks, but that is a pittance compared with the destruction of the dollar by US policy, in an attempt to devalue the dollar in hopes of exporting more goods.

The attempts by Washington on China and the yuan is understandable, and what is taking place by manipulating the yuan is wrong. Force is not the tactic that will work with the Chinese government. Reverse the roles. Would the US be bullied in the same situation? A fairly valued yuan would help the trade deficit and it would benefit China relative to domestic inflation. The US being portrayed as a bully won’t get us to the desired outcome.

Congress attempted last week to pass a bill to force the issue of a fairly valued yuan, but force never really works in these situations. The penalties for not adhering to a “fair” valued currency- across the board tariffs. Exchanging tariffs only hurts the US further. I say exchanging because that is how it will play out. Will the tariffs make Americans feel better? Absolutely, but they will only exacerbate the situation. In fact, if the World Trade Organization were to determine these actions as inappropriate the potential of a trade war would arise. A trade war would not be good for the US.

Step back and think for a second. If the yuan were not pegged to the dollar and it was fairly valued according to all the estimates, what would be the impact? The cost of goods from China would rise overnight. Since everyone likes to bash Wal-Mart for importing everything from China, they would have to raise prices equal to the imported inflation of the rising yuan. Does this directly impact Wal-Mart? Absolutely, but the consumer is the bigger loser in the end. The consumer who is already stressed receives more in the form of price increases. No doubt this is a growing problem and one to be dealt with. Passing laws on currency is probably not the best solution.

In dissecting the trade imbalance with China, there are plenty of issues other than the yuan. China’s discrimination against high-tech imports, manufacturing, and human rights are just a few. There is a broad spectrum of issues facing China and trade with the US. Focusing on equal access to China’s markets are equally if not more important than the yuan. The push towards high-tech innovation by China is being done with subsidies and discrimination against foreign companies. That is a clear violation of World Trade Organization rules. The US Steelworkers recently filed a complaint against the subsidies relative to clean energy technology. Following the rules and enforcing them relative to free or fair trade is the route for the US. Attacking China with force will only backfire on the US.

Using the paths set up for dealing with discrimination is a logical course of action for the US. Like it or not, we are seen as the big bully on the playground. This puts the challenge squarely on the administration to enforce the rules. In fact, Austan Goolsbee, the administration's chief economic advisor, is committed to getting China to play by the rules. For the sake of free/fair trade it is vital to do so.

The S&P China ETF (GXC) broke out of the 15 month trading range to hit a new high last week. The interest level in investing in China is growing despite all the talk about fair trade, yuan/dollar valuations and trade deficits. As an investor we have to look at how to make money from these situations as the resolutions evolve. Singapore (EWS) and Hong Kong (EWH) are moving higher as benefactors in the region. If the yuan is going to float against the dollar WisdomTree Chinese Yuan Currency ETF (CYB) may be an opportunity as well. UDN, Powershares US Dollar Bearish ETF has definitely been an opportunity over the last four months. If and when the resolutions to the current situation between China and the US are resolved there will be more opportunities created.

Jim Farrish is the Founder and Editor of SectorExchange.com and TheETFexchange.com.  His primary goal is to educate people about investing.  He has taught workshops locally and nationally for over 25 years, teaching thousands of individuals, business owners, and advisors how to focus on achieving financial independence.  Jim Farrish is the CEO of Money Strategies, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Money Strategies, Inc., web site.

© 2010 Copyright  Jim Farrish

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