Morningstar Advisor - December/January 2012 - (Page 57)

Zhiwu Chen I think if China let the renminbi exchange rate be totally determined by market supply and demand the renminbi would go lower instead of higher. come up with the right equations for determining the correct exchange rate. Most people focus on trade: As long as China maintains a high trade surplus, then that must mean that the renminbi is undervalued. So, the renminbi should be revalued in order to bring down the trade surplus close to zero. But that’s just one aspect. The second, perhaps more important, theory for exchange-rates determination is purchasing-power parity. What that means is that if you have the same hamburger or the same shirt, ideally it should cost the same amount based on the exchange rate in the U.S. and in China, after you take out the transportation costs and so on. But the reality for those of us who travel between China and the U.S. a lot is that common, midlevel brands of clothing, appliances, and things we use here in the office are actually way more expensive in China than they are in the U.S. Whenever I receive a delegation from China, all of them want to go to shopping malls in Connecticut and New Jersey to buy many bags of clothes, even though most of them were made in China. The exchange rate for the renminbi is so messed up that Chinese tourists in the U.S. find the prices of American goods made in China incredibly attractive. I think if China let the renminbi exchange rate be totally determined by market supply and demand the renminbi would go lower instead of higher. So, I think the bill in the U.S. Senate introduced by Chuck Schumer (D-N.Y.) is misplaced, based on the purchasing power of the renminbi versus the dollar. The renminbi is overpriced right now, rather than underpriced. I also think it’s very dangerous for U.S. politicians and trade associations to put too much pressure on China to try to revalue the renminbi and make the renminbi priced higher—because at this point, China does not need any more foreign direct investment from the U.S. or other countries. In fact, China has too much capital. So, the U.S. really doesn’t have much leverage with China on the investment front. If anything, China has the upper hand. So, for Chuck Schumer and others to put pressure on the Chinese government on the renminbi exchange rate, besides starting a trade war between the two countries, I don’t see much of an outcome. That is why this pending bill would have to rely on tariffs imposed on Chinese goods. But increasing tariffs on many Chinese goods is bad for both the U.S. and China. China, of course, would definitely retaliate, so when that happens, American families will have to pay higher prices for the same goods they buy at Walmart and Target. I don’t think that is good for American families at this point, when the unemployment rate is 9.1%. Peng Chen: What’s the mind-set of Chinese regulators and the Central Bank on exchange rates? Zhiwu Chen: From what I know by talking The real estate bubble, high-speed train infrastructure, the big fancy airports, highways—all these projects were started as part of an effort in the past three years to help the Chinese economy get through the financial crisis. All of these things will lead to a lot of nonperforming loans. People in China talk about the three 10 trillion numbers. The first 10 trillion is the amount of government spending as a result of the financial crisis, starting with the 4 trillion renminbi announced in October 2008, at the height of the crisis. The second 10 trillion is the amount of local government loans. It’s actually more than 10 trillion, but to make the numbers sound better, they just shrink 14 trillion to 10 trillion. The third 10 trillion is the underground private loans that have mostly occurred over the past one year as a result of the tightening monetary policy by the Central Bank and as a result of a restriction on allowing private financial institutions to emerge and develop legally. These three 10 trillions are burdens, and many of those trillions will become nonperforming loans in the next few years. Why the Renminbi Is Overvalued Peng Chen: What are your views on the Chinese currency? Is it undervalued? Zhiwu Chen: I think the Chinese renminbi is actually overvalued. Peng Chen: That’s interesting. Zhiwu Chen: Of course, I know there are many different theories in economics that all try to to friends inside the government and outside the government but who have some influence over the official policymaking, the vast majority of them really think the renminbi is overpriced. There are a few, but a very small minority, who would like to see the renminbi revalued and go to a higher exchange rate as a way to contain or limit the tendency MorningstarAdvisor.com 57 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - December/January 2012

Morningstar Advisor - December/January 2012
Contents
Contributors
Letter From the Editor
Seduced by Complexity
Is China Exposure Important for a Portfolio?
A Niche Built on Trust
How to Find Your Client’s Investment Style
Taking the Long View
Consensus on Europe Elusive
Four Picks for the Present
Investment Briefs
Is Perception Reality for Active Managers?
Be Alert for Basic-Materials Bargains
Investment Boom Unsustainable
Digging Moats in China
Where China’s Domestic Companies Stand to Benefit
Arising Opportunities
China Strong Long Term
From Currency Manipulation to International Acceptance
The Keys to China’s Fortune
Wedgewood’s Lessons Pay Off
Reading the Evidence on Indexing
Scouting for Investments Abroad
Yield, Please (Hold the Europe)
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
China Fund Managers Eat Elsewhere

Morningstar Advisor - December/January 2012