Global Headlines, Local Gains


November’s biggest China news was the unprecedented scale of buying on Singles Day, November 11. As staged by Alibaba as a 24-hour celebrity television shop-a-thon, Singles Day showed that Chinese shoppers are undaunted by the country’s economic slowdown, and are willing to do their part in converting their national economy to a consuming and service economy.

Not only did Singles Day’s $14.3 billion dwarf the previous year’s record, it also dwarfed the total spending during last year’s Black Friday-through-Cyber Monday spending in the U.S. (We don’t have complete figures for this year’s post-Thanksgiving shopping spree, but the four-day U.S. spree may take the record back.) But holding the title means nothing; having consumers in China opening their wallets is the key takeaway.

This week, the biggest news about China is the decision by the International Monetary Fund (IMF) to add the yuan to its list of global reserve currencies. The Chinese currency joins the U.S. dollar, Japanese yen, British pound and European euro in the Special Drawing Rights basket of currencies. When the addition is actually implemented in October 2016, the yuan will make up just under 11% of the basket.

(Quick note: The Chinese currency is officially known in Mandarin as the renminbi or “people’s currency,” which is the equivalent of “the U.S. dollar.” The yuan is the name of the unit of currency.)

China has been seeking to have the yuan added to the IMF’s basket for a long time, so there was no doubt some celebrating when the decision was announced on Monday. For Chinese leaders, the move is a confirmation of the economic progress China has made and carries some definite prestige with it.

But beyond the satisfying symbolism, there are a couple of deeper implications in the move.

The IMF uses its basket of currencies to deliver bailout funds to nations needing help (think of Greece), but restrictions on the trading of these currencies are also a powerful tool in the imposition of sanctions on global human rights abusers like Sudan and North Korea. If these countries can still trade the yuan, it will reduce the effectiveness of sanctions. (Always defensive about foreign charges concerning its own human rights practices, China firmly supports the sovereignty of each nation to set its own policies without foreign interference.)

The bottom line is that each step China takes toward fuller integration with the global economy will bring with it more pressure to support the global consensus.

Likewise, joining the group of reserve currencies will limit China’s freedom to both control the value of the yuan (including occasional depreciations) and to restrict capital inflows and outflows to protect the autonomy of Chinese companies. Unrestricted capital flows represent a loss of control, and it’s easy to imagine future conflicts over how much influence foreign holders of the yuan can exert on Chinese monetary policy.

Getting back to the smaller picture and the charts that influence our day-to-day transactions, we note that Chinese ADRs continue to outperform the broad universe of emerging-market stocks that trade on U.S. exchanges.

EEM (iShares MSCI Emerging Markets ETF) has been trading mostly sideways in a tightening pattern since its August–September double bottom. That’s not bad, but it leaves our Cabot Emerging Markets Timer basically on the fence.

By contrast, starting in late September, PGJ (PowerShares Golden Dragon Halter USX China ETF) rebounded strongly from its August bottom, rallying through early November and correcting just to its 25-day moving average during the early November correction.

Accordingly, although we will remain cautious about markets in general, we will take the performance of Chinese ADRs very seriously, including this issue’s stock choice.

This is an excerpt from Cabot Emerging Markets Investor, which seeks to capitalize on the enormous potential in emerging market countries. Chief Analyst Paul Goodwin has been a researcher and writer for over 30 years and a member of the Cabot investment team since 2005.

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Paul Goodwin can be found on Google Plus.

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