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Conflicting Messages: Yuan And China Shares

November 15, 2012
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FXIiShares China Large-Cap
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Asia-Pacific ETFs, China ETFs

The Chinese yuan just hit an all-time high against the greenback. At the same time, the Shanghai Composite is bumping up against all-time lows. What gives?

The Chinese economy is sending more mixed signals than a prom date.

On the one hand, the renminbi just hit a new all-time high in dollar terms. On the other hand, the Shanghai Composite is down 4.5 percent year-to-date, and has lost more than 62 percent since hitting a closing high of 5,456 on Jan. 10, 2008.

For ETF investors looking at China and wondering just what the heck is going on, the chart below illustrates the ambiguity well.

 

FXI vs yuan since 2008

 

While the currency seems to be moving slowly and steadily higher against the greenback, the country’s equity market seems to be in the process of breaking down.

Even the blue-chip focused iShares FTSE China Index Fund (NYSEArca: FXI) has been bleeding what looks like a slow death. In fact, a move below 2000 on the Shanghai composite—which closed 1.2 percent lower on Thursday at 2030.29—would spell certain doom in the eyes of technicians the world over.

Because of the opacity of the Chinese “market,” investors are ultimately left to decide which manipulated market is telling the truth.

On one side you have a “freely” floated currency that has been climbing higher week-by-week, year-by-year since it was unpegged less than a decade ago.

Of course, the value of the yuan is disproportionately impacted by policymakers as opposed to market participants, the latter group not allowed to move currency in and out of the Chinese system freely.

In other words, it’s hard to know just how much of the increase is due to real market forces and how much of it is due to manipulation by the central bank.

A dollar bear may make the case that the rise of the renminbi is the inevitable product of fiscal and monetary malfeasance in the United States.

A China bull may also argue that the rise is inevitable—but will be due to the sustained growth of the consumer class in China and the impact of economic expansion, rather than U.S. profligacy on the other side of the Pacific Ocean.

In their eyes, even an economy slowing from double-digit growth to high single-digit growth is a force to be reckoned with.

 

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