Tags: China | Proxy | Currency | Investment

The China Proxy Currency Investment

By    |   Wednesday, 02 May 2012 08:16 AM

China has often been a subject of debate when it comes to the growth rate and whether it is growing or not. There are more believers in the China growth story than the naysayers, but the naysayers are fairly vocal.

In times like now (a huge level of uncertainty), we often hear about the doubts of China’s growth and about how a lot of it is stage managed. While I will be the first to admit that all isn't quite right in China, I shake my head in amazement when I often read articles by the naysayers who have never even visited China.

Having been there a dozen times or more, I have seen the growth story in China unfold over the past decade. It is an impressive change even for a regular visitor like me. I am very confident that we will see a moderated, but a continual and definitive, growth story continue to emerge in China.

The challenge has often been not to buy “the fool’s gold” China story. Not everything that shines is gold and not everything Chinese deserves a place in your investment portfolio. If you can navigate the investments for what they really mean, you may have to invest directly in China. And that is fraught with its own set of risks.

So how does one invest in the real China without actually heading over there?

One way would be to buy the Chinese yuan and profit from its gradual but definitive appreciation. While that is a boring, but a real winner, you will have to accept that the yuan is tightly controlled the Chinese government.

There is a much easier way to play the China growth story without buying Chinese stocks or currencies.

The free market is what we embrace and that is what you will find in Singapore. The economy is flourishing and the government has a very prudent outlook on growth. They haven't, and most likely won't, interfere with the growth trajectory and allows the currency to appreciate at the market rates. The Singapore dollar is freely traded and is free of most of the manipulations that the Chines yuan is afflicted with.

One can buy the Singapore dollar directly at some U.S. banks onshore without your money ever leaving the U.S. shores. And if you don't like a direct investment, Barclays Global Investments offers an ETF that buys into the Chinese yuan and Hong Kong dollar and Singapore dollar.

I like that strategy best as it is holding yuan and Singapore dollars. It is also holding the Hong Kong dollar, which is pegged today but has a higher probability of breaking the peg and rising against the U.S. dollar than the yuan.

The ETF also holds Saudi riyals and UAE dirhams. As of now both currencies are pegged to U.S. dollar but both have a high probability of breaking that peg soon. Should that happen, we will see this ETF soar.

I would take advantage of the ETF and invest into the Singapore dollar either directly or through the ETF strategy.

Enjoy the growth of China without leaving your computer and avoid the expensive mistakes of buying the wrong stocks in China.

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Wednesday, 02 May 2012 08:16 AM
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