While many investors discuss whether or not the economy of the People’s Republic is having a ‘hard’ or ‘soft’ landing, there is no debate the Chinese renminbi (CYB, quote) is gaining greater acceptance as a currency of exchange. Those looking to buy and sell in emerging market nations should take note.
The Financial Times reported Tuesday that the FTSE index group has created an index of eleven currencies and two commodities for use by investors to hedge against currency and inflation risk. The “Wealth Preservation Unit” includes the world’s seven largest currencies and those of Brazil, Russia, India and China, as well as a 4.5 percent weighting in gold and oil.
It may seem odd that legendary investor Jim Rogers has been as bullish on Euros and dollars as he is bearish on European and American stocks. But the recent rise of the Euro and the fall of the yuan play to the advantage of China.
About 40% of China’s gross domestic product comes from exports to the United States and Europe. Keeping those exports going is one of the reasons why the Chinese buy so much American and European debt.
There are many reasons for China not to buy debt instruments denominated in the European currency (FXE, quote). One of the most important is that the weaker the euro gets, the stronger the Japanese yen (FXY, quote) gets as a relatively safe haven. This, in turn, pushes up the cost of Japanese exports.
Legendary investor Jim Rogers once declared that a weak currency is evidence of a weak economy, which is evidence of a weak government. Japan is all for a strong currency — for China.
The official purchasing managers index from China came in at 49 in November, reflecting a slight contraction. However, traders were already steeled for much worse, so markets actually rallied in relief.