Deng is Smiling

Research Edge Position: Long Chinese Yuan via etf CYB

Deng Xiaoping is the now deceased Chinese leader who took over the reins of China after Chairman Mao.   While Deng never held office as head of state or head of government, he did serve as the Paramount Leader (a Chinese expression for the leader of the party and country) of the People’s Republic of China from 1978 to the early 1990s.  Deng was of course known for implementing market based reforms.  In referring to economic policy the diminutive Deng once stated:

“It doesn’t matter if a cat is black or white, so long as it catches mice.”

His point was that if market based policies could expand the growth of the Chinese economy, then those were the appropriate policies to follow.

In 1978, China’s GDP in real terms was ~$147BN and it ranked eleventh in the world, while the United States ranked first at $2.3TN.  According to the IMF, and most other data sources, China is now ranked third globally with a GDP of $4.3TN, which is an increase of 292x in thirty years.  The United States’ GDP is now $14.2TN, which is an increase of 14x over the same time period.  Clearly, Deng would be smiling at this massive global GDP share gain over the last thirty years.

In recent days, we have seen continued evidence of the engine of Chinese growth, and the power of its stimulus program as it relates to car sales and home sales.  The Chinese consumer continues to power through the global downturn.  In October, Chinese passenger vehicle sales rose 76% y-o-y last month with a sales number of 946,400In total, this brings the year-to-date sales to +45.2%.  The test for car sales will of course occur at the end of the year, when stimulus measures, such as car tax cuts, expire.  The Chinese central bank also reported today that the prices of houses sold in 70 major cities rose 3.9% y-o-y, the highest rate in 14-months.

While many still question the impact of the U.S. stimulus program, except for the those on Wall Street who are benefitting from the Banker Bonanza, the Chinese seem to have gotten their stimulus package right, as their consumers are spending.

We remain long the Chinese Yuan as it seems likely that the Chinese government will continue to let their currency appreciate over time, as well they should given the relative strength of the domestic economy.

The Ox seems to be catching mice.

Daryl G. Jones
Managing Director