My previous China report contained a complete list of all China(related) ETFs along with facts that point towards a shift in sentiment against the manufacturing giant from the East.

For the past decades, the US and most other developed countries have effectively outsourced their pollution (see previous article) and manufacturing to China.

How it all started:

1) February 21, 1972 – February 28, 1972, President Nixon visits China. This was the first step in formally normalizing relations between the US and the Peoples Republic of China (PRC). It also marked the first time a US President had visited the PRC, which considered the United States one of its biggest enemies.

At the conclusion of his trip, the US and the PRC Government issued the Shanghai Communique, a statement of their foreign policy views and a document that was to remain the basis of Sino-American bilateral relations for many years.

2) On July 2, 1962, Sam Walton opened the first Wal-Mart Discount City store. By 2007 the Walmart brand reported close to $400 billion in revenue. According to Wikipedia.com, 70% of the goods sold at Walmart stores are manufactured in China.

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In 1986 the US had a net positive trade imbalance with China, importing a little more than $300 million of goods per month.

For 2008 the average trade deficit with China is close to $27 billion per month.

Without products made in China, Walmart and other store shelves would be close to empty. One could argue that over the past 20 years, the manufacturing infrastructure of the US has deteriorated to a point that we are no longer self-sufficient – in other words; we are dependent on China.

As long as Chinese products are cheap and safe, nobody really complained, however the times of cheap products made in China might soon come to an end. Why?

FYI: We sold the iShares FTSE/Xinhua China 25 ETF (Ticker: FXI) in our World Traveler Ready-To-Go Portfolio on 10-17-2007 at 218.20, within pennies of the all-time high. FXI now trades at around $125.

a) Artificially deflated Yuan - According to estimates, it takes 40% more Yuan (Chinese currency) to buy a dollar than it should. This makes American made goods more expensive in China and Chinese made products cheaper in the US. Already back in 2006 Senator Graham wanted the U.S. government to "tell" the Chinese to quit deflating the Yuan, or to impose a big tariff on Chinese goods entering the United States.

b) Increasing inflation - According to the National Bureau of Statistics of China, the Consumer Price Index reports an inflation rate of 8.5%. This is before the Chinese government announced on June 19, 2008, that it is raising fuel prices—gasoline, diesel fuel, aviation kerosene and electricity—in the country. Prices of gasoline and diesel will be lifted 16% and 18% respectively. Previously, Chinese consumers have only been paying $2.80 for a gallon of gas. Prices for fresh vegetables, fish, meat & poultry are up between 15% and 50% year over year.

c) Expiration of cheap labor - With soaring inflation wages are bound to increase.

d) Environmental accountability - The lack of implementing meaningful environmental policies and the environmental degradation of air, soil and water can only go on for so long. With (eventual) environmental accountability come higher costs.

If you think China’s expansion is not affecting US consumers as of yet, think again. My next article will show how the Chinese’s thirst for wealth is being felt in American consumer’s pockets right now. It’s like a pair of scales that is shifting from one side to the other. When one side goes up, the other has no way to go but down.

China ETFs:
 

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