How Best To Appreciate a Rising Yuan

The process will be gradual, perhaps painfully so, but this Chinese policy shift is a good sign for global investors. For one, it’s a strong vote of confidence in the world’s economic recovery, as well as a signal that Chinese consumers can bolster their economy with increased domestic demand.

***So how do small-cap investors take advantage of this macroeconomic story?

First, we should look to Vietnam. I discussed the country's promising future a few weeks ago in my article International Getaways for your Capital. My basic thesis in this letter was that as China’s migrant worker population dwindles, the reduced number of workers can successfully demand higher wages. This in turn will lead foreign companies to leave China (partially) and seek a country with similar laws but cheaper labor. Vietnam already benefits from this trend. New Canon Inc. and Sanyo Electric factories already started production in Vietnam.

The Renminbi revaluation will speed up this factory migration trend. The Vietnamese dong is a particularly weak currency. A strong Yuan makes Vietnam’s economy a cheaper place for multinational firms to do business. It also makes Vietnam’s exports much cheaper for China, its northern neighbor and largest trade partner.

The ETF Market Vectors Vietnam Index (NYSE: VNM) represents a good way to get exposure to the Southeast Asian state. VNM isn’t a pure-play small-cap ETF, but the fund has 70% of its holdings listed in Vietnam, and over 40% of included firms are small-caps. Yesterday, the stock’s trading volume was about four times its normal amount, showing that investors are all over this opportunity.

***Second, commodities. China’s foreign policy has one overarching goal—feed the beast. China scours the world looking for the fuel and raw materials to feed its economy’s tremendous growth. During the past year, China has been buying up energy and mining assets across the globe.

A stronger yuan means international mines and oil wells will be even more attractive for China to purchase. As China buys up more and more raw materials to be used domestically, international prices will increase for those resources fueling China's growth: gold, copper, silver, iron, oil, and coal.

Last week I added a silver mining small cap company to the Small Cap Investor PRO portfolio. Subscribers can capitalize on the opportunity in silver right now. Since I added it shares have risen 5 percent. I have a 'buy up to' price on shares that is rapidly approaching - so if you're interested in a great small cap silver miner you should check this company out soon.  Click here to find out more about this great little company.

To take advantage of China’s appetite for gold, I’ve written a full report about my favorite gold company. This company has over $20 billion in proven gold reserves, with a market cap of around $200 million. Even if this company only mines 1% of its reserves, it could double its current share price. Click here for the full write up on this four dollar gold stock.

And finally, I've recently added a coal mining company with major operation in China. Click here to find out more about this company.

***Third, Chinese consumers. Sure, the Chinese government was heavily pressured the world over to let the yuan appreciate. But Beijing fears its own populace far more than any saber-rattling Midwestern Senator, and would not have made a move on its currency if it would seriously hurt the Chinese economy. Beijing’s decision to de-peg the yuan is a signal that the Chinese consumer is ready to step up and make a real impact on China’s economy.

Deer Consumer Products, Inc. (NASDAQ: DEER) is a small-cap Chinese appliance manufacturer with strong sales both domestically and internationally. The company hedges by using dollar-based prices for all international transactions. The firm is well-positioned and well-capitalized to take advantage of increased domestic demand for its products. As a manufacturer of modern kitchen appliances, the growth of the Chinese middle-class means an expansion of their customer base.

Deer has a market cap of $322 million, and its stock price shot up 9% to $10.06 yesterday. I’m clearly not the only person who thinks that this company is a good yuan play. Of course, I recommend that you do your own research before making a decision about any stock, and Deer is no different.

China is the world’s third largest economy, and its currency is undervalued by 20-40%. Allowing the yuan to appreciate will have widespread effects, including increasing steel prices to decreasing Wal-Mart savings (yes, expect prices in the U.S. to rise) - world economies are going to change.

I've outlined a few ways to play the trend, and will return to this subject in future issues of Small Cap Investor Daily. Since the yuan's appreciation will likely be slow and gradual, our move here is to consider the long-term trends, and establish positions that are likely to benefit.