Who Lost China, Again?

03/18/2010 3:54 pm EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

After the Great Recession, Cold War II?

Until very recently, the bluster gusting between Washington and Beijing could be dismissed as mostly harmless venting for domestic consumption. There’s too much trade and too much wealth at stake to break up the odd couple, people thought. US shoppers depend too much on cheap Chinese goods, while the Chinese benefited hugely from American technology and willingness to pile up debt.

Lately, though, the incentives to get along have dried up. The loss of so many jobs in the US, the rise of Chinese corporations, and China’s complaints about US interest rates and budget deficits have turned the world’s most important relationship into much more of a zero-sum game.

It hardly matters that a stronger yuan would send Chinese jobs to Vietnam and Indonesia rather than back to the US. It’s an election year, and there are not enough jobs to go around, while China’s made itself so cheap that it’s got jobs chasing workers, so it’s going to get the blame.

A new Senate bill may prod the Obama Administration, which is already intent on getting tougher with Beijing, into declaring China a currency manipulator as a prelude to a trade complaint and, ultimately, sanctions.

But in his yearly press conference, Chinese Premier Wen Jiabao retorted that Washington was doing the manipulating by failing to prop up the dollar. He denied the yuan is undervalued, and professed to be concerned about the security of China’s investments in the US.

Meanwhile, the headline on the front page of Wednesday’s Wall Street Journal reads, “Business Sours on China,” as native Chinese competitors secure preferential treatment in the fastest-growing market on earth. China seems to have lost many of its former allies in the US business community.

The more politicians complain ahead of the elections, the harder it will be for China to budge. Nor will the irritants disappear in November. Coincidentally or not, Shanghai shares have lagged the gains in Mumbai, Moscow, and Sao Paolo this month, making China seem the heaviest of BRICs.

Meanwhile, many of the usual suspects have been pardoned. Ukrainian stocks are up 24% in a month, after an election that improved the odds of a new deal with the International Monetary Fund to avert default. Turkish stocks  are up 11% in three weeks, recovering from a stumble after the government charged scores of former army officers with having plotted a coup. Greece is up as much over the same span, despite securing neither money nor a blueprint for aid from its European allies. Chile needed little more than a week to erase the market losses sustained after the earthquake, pushing back towards record highs.

There are still bargains to be found here and there, and Ryan Irvine sees some in a few of the Chinese companies that have opted to list in Toronto, where valuations are not quite as frothy as in Shanghai. Western European stocks are also cheap, a fund manager tells Andrew McHattie, especially so considering that many European multinationals are emerging-market plays in their own right.

Asia’s more expensive, with good reason. Yiannis Mostrous tries on for size a Hong Kong-listed ladies’ footwear chain whose share price has nearly tripled in a year, and argues that it has more room to run. Those who prefer a higher dividend can opt for yet another generous Canadian energy trust, writes Gordon Pape.

Perhaps now that the global pie is growing again there will be less fighting over crumbs. For the moment, investors don’t seem worried. Enjoy it while it lasts.

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