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The Tale of the Chinese Yuan

The markets stormed out of the gates this morning on news that the Chinese government planned to lift the 2 + year old artificial peg of its Yuan, or Renminbi, currency to the U.S. Dollar. While only minor increases in the value of the currency are expected initially, market professionals are taking a positive, long term view to this announcement.

It should be noted that this topic, and this stance, by the Chinese government is nothing new. As we commented on in our March 12, 2010 posting called “Removing the Peg from the Chinese Yuan,” we, at Hennion & Walsh, believe such changes will likely result in a gradual strengthening of the Chinese currency which could help U.S. multi-national companies who export their products into the ever expanding China marketplace.

The rationale behind our belief is that with a stronger currency, Chinese consumers would have increased purchasing power, and given the current strength of their own economy, make them more likely to increase their spending on domestic and non-domestic goods and services.

China, with over 1.3 billion captive consumers, represents a very attractive target market for many international companies. In fact, according to About.com: Geography, China and India alone account for approximately 40% of the world’s population! Yet, many economists have argued that China still predominantly lower class and, thus, not able to possess significant relevant purchasing capabilities. However, according to Bruce Upbin’s Forbes.com article on June 9, 2010 entitled How to Think About the Chinese Consumer, “China’s middle class is defined as urban professionals and entrepreneurs between 25 and 45 years old who have college degrees and earn between $10,000 and $60,000 a year.” This equates to 300 million people, “…larger than the total U.S. population” and “…Chinese middle class consumption will surpass that of the United States over the next few years.”

Hence, the case for the global economic recovery capabilities of the Chinese consumer when coupled with a vibrant economy and strengthening currency is a strong one. We just don’t believe that the case will be made overnight as the Chinese government will likely control the pace of the lifting of the peg and its associated implications.