Friday, October 29, 2010

Notes From the Ground in China, Part II

By Eric Jackson

RealMoney Contributor

10/29/2010 7:30 AM EDT

Click here for more stories by Eric Jackson

It's been a week since I arrived in China. I have spent time in Shanghai, Beijing, Harbin and each city's suburbs, and this morning I was up in the countryside of Heilongjiang Province near the Russian border. I have had the chance to meet with company executives, workers, locals and government officials. I wanted to provide some commentary on some of the China-related topics that get a lot of coverage in the U.S. press, which I believe are important to consider when thinking about investing in a public company here.

Dollar-Yuan Rhetoric

We hear endless talk about whether and when the Chinese will revalue their currency, which is currently pegged at about 6.6 yuan per dollar. U.S. politicians keep saying it needs to go higher, although they never say what rate they would ultimately prefer. I've heard fund managers Jim Chanos and Hugh Hendry suggest the yuan would sink vs. the dollar if it were allowed to float, though I personally just don't follow their logic in that.

In any case, if the yuan were allowed to float, I'm sure it would rise against the buck, but I don't expect this to happen. No matter how many U.S. politicians talk about what China should do -- including members of the House of Representatives who seems have never gone to China, but have no problem spouting off policy prescriptions -- and no matter how many G8 countries engage in these same discussions, none of it will have any bearing on what Beijing does.

Think about how long this issue has been debated. In all that time, nothing substantive has happened. Moreover, try to put yourself in the shoes of the Chinese government. Why would you want to raise the value of the yuan? How does that help you and the Chinese people? Remember, China's goal -- kind of like that of the U.S. Federal Reserve -- is social stability, which means full employment and price stability.

Given the upcoming U.S. elections, a lot of theater is going on right now, and politicians are saying a lot of things so they can tell their constituents that they said a lot things. Don't expect the yuan to move much, if at all.


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