China is expected to allow its Renminbi or Yuan to increase nearly 8 percent against the U.S. dollar in 2012 to boost its economy, according to Oliver Pursche, co-portfolio manager of GMG Defensive Beta Fund.
Slowly and rather quietly, China has already begun to loosen monetary policy. For instance, at the end of November, it lowered the reserve requirement for six banks.
Unlike the U.S., where monetary policy is carried out through a series of complex market transactions, the Chinese government simply told these banks what to do.
In addition, China will continue to lower rates in the first half of the year to spur on growth. Europe accounts for roughly 25 percent of China's exports, and lower demand from Europe will be material for China.
I firmly believe that the Chinese government's monetary policy is being dictated by more than just supply and demand. Just 20 years ago, the Chinese people lived in conditions that were equivalent to those we experienced in this country during the 19th century, said Pursche.
The Chinese government realizes that it must keep this progress going or face massive social unrest. Count on them to do everything they can to maintain growth. Looser monetary policy may the least of it.
The way for investors to play this is to own consumer staples multinationals. We own McDonald's (NYSE:MCD), Caterpillar (NYSE:CAT), Yum Brands (NYSE:YUM) and Procter & Gamble (NYSE:PG). Though we do not own it, the Consumer Staples Select Sector SPDR Fund (XLP), is another way to play growth in China, added Pursche.
China, the world's second-largest economy after the United States, holds huge US dollar reserves in the forms of US government bonds and institutional bonds. Total Chinese foreign exchange reserves stood at $3.2 trillion by the end of September, according to the latest available data.
Currently, Chinese Yuan is trading at 6.37 against US dollar.