Let China put money in your pocket

By Jim Jubak

From the perspective of the global economy, there's a whole lot that's wrong with China's refusal to let its currency appreciate against the U.S. dollar:

• It's killing the exports of China's Asian competitors, who are seeing their won and yen appreciate against a renminbi that's falling in price along with the dollar.
• It's delaying any real rebalancing of the huge trade deficit between the U.S. and China.
• And it's feeding into soaring asset prices, bad loans and runaway investment in unnecessary manufacturing capacity in China.

But if you're an individual investor looking to put money to work, the dollar-renminbi peg is a gift. And you'd better put it to work for you now, because it won't be here forever. (For my take on how long the peg will last, see my Jubak Picks blog post.)

As a humble investor looking for someplace to put some cash, the world's emerging markets are likely to appeal to you. These economies look set to grow faster than those of the United States, Europe and Japan for a decade or more, but emerging-market stocks have had a huge run. Forget getting in through the back door either: The commodity-dominated markets of countries such as Australia and Canada have run away from you, too.

Are you ready for the final straw? The currencies of many of these countries are much stronger against the dollar than they were at the beginning of 2009. Not only are emerging-market and commodity-economy stocks more expensive in their own currencies than they were when this rally started March 9, but they are superduper expensive to any investor who needs to buy them with U.S. dollars.

Other currencies climb against dollar

The Indonesian rupiah is 17% more expensive against the U.S. dollar than it was at the beginning of 2009. The Brazilian real is up 35% against the dollar in 2009. And the Australian dollar is inching toward parity with the U.S. dollar. It's up about 33% in the past 12 months.

Not the Chinese renminbi, though. In July 2008, when China re-pegged its currency to the dollar, it traded at 6.8 to 6.85 renminbi to the dollar. Today it trades at . . . 6.8 to 6.85 renminbi to the dollar.

I won't pretend that Chinese stocks are cheap now. The iShares FTSE/Xinhua China 25 (FXI) exchange-traded fund, or ETF, is up 88.5% since March 9. That's significantly more than the stunning 60.6% gain on the Standard & Poor's 500 Index ($INX) in that period. But it's less than the 122.7% appreciation -- in dollar terms -- in the iShares MSCI Brazil Index (EWZ) ETF.

Most of the difference in the gains in the China ETF and the Brazil ETF -- from the perspective of a U.S. investor tracking the world in dollars -- is due to the 35% appreciation in 2009 of the Brazilian real against the dollar versus the 0% appreciation of the renminbi against the dollar.

Video: The best plays for China stocks

Think about that for a moment. First, it means that U.S. investors just putting money into the Chinese market don't have to pay the penalty for 2009's incredible sinking dollar. Second, it means that these investors actually have the future appreciation of the renminbi to look forward to.

Continued: Spring-loaded currency

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