For years, China has been the “hot” market, as the communist nation gone capitalist brings investment funds from all over the world. With a rising middle class and a growing trade surplus with the United States, China stands to profit heavily from a weak currency and a growing accounts receivable column.
The Chinese have benefited from a government regulated currency formerly pegged to the US Dollar at a rate of 8.28 to one US dollar. To put it simply, heavy monetary policy is the cause of the recent economic troubles for the United States – and the benefit of Chinese manufacturers.
History of the Peg
From 1994 to 2005, the Chinese Renminbi was set at a rate of 8.28 to the dollar. After the dollar’s long slide, the Chinese benefited from a currency fall as well, bringing more manufacturing jobs to the country and boosting US exports to record levels.
After the threat of many economic sanctions, including an import tariff of 40%, the Chinese ultimately decided to let the Renminbi float against a basket of currencies. These new price limitations were enough to silence US lawmakers, who had been calling for added tariffs. Conveniently, this new strategy gave China an excuse for an undervalued currency. Investors believe the Renminbi to be worth 40% more than suggested, citing the tariffs that would have been enacted if the situation was not alleviated.
Since the release of the peg, the Renminbi has advanced to 7.2 to the US Dollar, giving the United States a better trading advantage, but continuing the trade deficit between the two nations. As the US Dollar falls in value, the Chinese currency should advance comparative to the amount the US Dollar falls. Investments in corporations like Coca-Cola, which has invested more than $1 Billion dollars in China, will benefit from a gaining Renminbi and a falling dollar.
How to profit from currencies
The rise of a currency is not always due to a trade surplus, but also the result of the rise of a middle class and increased consumption of domestically produced goods. Soda is the drink of the middle class, and Coca Cola (KO) also profits from the difference in exchange rates. Profits in China are enhanced further when converted back to an inflated currency. As the Renminbi advances against world currencies, including the US Dollar, profits from multinational corporations are multiplied.
US corporations, such as McDonalds and Coca-Cola, will benefit from large investments in China paying off fundamentally, as well as from the increased value of Chinese currency. Some of the best investments today capitalize upon the Chinese currency boom.