Fast-Food Stock for a Stronger Yuan

06/28/2010 2:08 pm EST

Focus: STOCKS

Yiannis Mostrous

Editor, The Capitalist Times

Yiannis G. Mostrous,editor of The Silk Road Investor, says China’s nod toward a freer currency will help it enjoy more fried chicken.

The Chinese have finally moved on the currency front, just days before the G-20 summit in Toronto. The People’s Bank of China (PBoC), in a statement released June 19, announced that it would proceed “with reform of the RMB exchange rate regime, while enhancing the RMB exchange rate flexibility.”

Contrary to popular expectation China didn’t go for a one-off renminbi (RMB) revaluation, as was the case five years ago when the Chinese currency was revalued by 2%. Rather, as I forecasted last year, China followed its favored way of gradualism. Consequently, seasoned currency observers now expect a 0.2% appreciation per month against the US dollar until the economic situation in Europe stabilizes. I agree with this assessment, as my view has always been that China would only move on the currency front when its leaders feel comfortable.

China’s currency move is a small one, and the RMB remains undervalued. At the same time, though, it is a move in the right direction because it will deflect international criticism in the short term. And it is another step toward rebalancing the Chinese economy.

A stronger RMB will hurt small exporters that lack pricing power, but it will also help contain inflation while improving people’s spending power.

On the political front protectionists in the US can declare victory even though they know that, economically, their arguments about the RMB and its impact on the US economy are shaky at best.

The reason is that more than 70% of the final prices US consumers pay for [imported] products is attributable to costs associated with shipping, advertising, rents, profits margins, sale costs, and the like. It doesn’t matter how much wages will rise in China, or how much stronger the RMB will be in the next five years. The big costs are to be found after the products leave the Chinese factories.

From an investment perspective, continue to concentrate on domestic demand-oriented companies based in Asia as well as a select number of similar Western companies that have been doing business there for a long time. The quintessential US-based company exposed to the Asian domestic demand story remains Yum! Brands (NYSE: YUM).

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