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Why the Chinese Yuan is the Currency To Own for the Next Decade
My wife was in a mood that morning I called her from the office in mid-2003. She was all crotchety on the phone, and, so, to harass her a bit, I said, “Ok, then, well I guess I won’t tell you that I think maybe we should adopt a baby. Talk to you later. Bye.”
And I hung up. I was smiling and giggling to myself. I knew that comment, without any follow-up conversation, would really get under her skin.
The joke was on me.
By the time I returned home that night, to our house in northern New Jersey, my wife had already collected all the data on adoption services through my company’s HR department. She’d found an agency she wanted to use in Boston. And she was quite confident that we would be adopting a little girl … from China.
Fourteen months later, I was standing on the fourth-floor balcony of the Novotel, looking out over Hefei, a second-tier Chinese city a few hours west of Shanghai.
I’d been an investor in Asia for years at that point, and I’d traveled along the periphery of China.
But this was my first trip into China proper … and I immediately understood what people meant when they talked about “the growth of China.”
Everywhere I looked, construction cranes spiked the skyline. New malls, office towers and hotels. New schools. New hospitals. Even a new zoo (brilliantly designed so that visitors walk over the enclosures to look down onto free-roaming animals).
Since then, I’ve devoted most of my investment hours to understanding China and the opportunities it offers. And one of the best opportunities today and for the next decade is the Chinese currency – the yuan.
Government-Mandated Profits
I know the yuan scares some people. It’s not a freely traded currency. It’s managed and manipulated by the Chinese government.
And it’s a never-ending source of ire for U.S. politicians who know not what they’re talking about.
Still, it’s not often that the world of investing dishes up a sure thing.
And the yuan is a sure thing.
Depending on who’s doing the math, the yuan is undervalued by between 15% and 40% because China, to this point, has refused to allow its currency to float freely on the world stage.
But – and here’s where the opportunity lies – the Chinese government is committed to letting the yuan rise in value against the dollar.
U.S. politicians continually carp about wanting a stronger yuan, as though that will miraculously revive America’s devastated manufacturing sector (it won’t; and politician fail to realize it will destroy the Wal-Mart-shopping middle class).
China is acquiescing, but on China’s own terms – and since China has the money and we have little beyond a loud voice, China gets to call the shots.
Technically, the yuan is loosely fixed to the U.S. dollar, meaning that instead of trading freely, it trades within a prescribed band. The currency’s government minders manage that band on a daily basis, setting a narrow range within which the yuan can fluctuate.
These minders routinely expand that band to directly manage the yuan’s rise – against the dollar in particular.
Since mid-2005, when China began this process, the yuan has gained more than 4% a year on average against the greenback. But that understates what’s really happening because it includes the years of the global financial crisis, during which, for two years, the yuan’s minders essentially kept the currency flat.
Outside of that period, the yuan has steadily risen by about 5.6% a year – some years climbing nearly 7% relative to the dollar.
And this is a trend that’s set to continue. China recognizes the need for the yuan to rise, but not because of America’s bellicose politicians (we’re a country that is declining in stature globally, in spite of perceptions here at home). China recognizes the need because of its own issues in managing domestic inflation and growth.
Along with interest rates, money supply and bank-reserve ratios, China can manage its economy, global trade and domestic inflation by ratcheting the value of the yuan up or down. Ultimately, it’s in China’s best interest to let the yuan rise at a stable pace … and that’s precisely what Chinese officials are committed to doing.
For investors, that means owning the Chinese yuan will generate returns of 4% to 5% a year, on average, through the end of the decade.
And at some point, you’re likely to see China remove the band altogether … a move that would unleash the currency and prompt a sharp rise against the dollar.
Three Ways to Own the Yuan
Here are the ways you can own the Chinese currency…
- Everbank, through its World Currency division, offers a Chinese currency account, called an Access Deposit account. The minimum account size for the yuan is $10,000. The accounts are FDIC-insured, though you can lose value if the yuan weakens. The accounts pay no interest, so this is purely a play on the strengthening yuan over time.
- Bank of China, New York branch, now allows Americans to open yuan-denominated savings accounts. They, too, are FDIC-insured. You can convert as much as $4,000 a day into yuan, or $20,000 a year. These accounts do not pay interest.
- For those who want to have money offshore, you can open a brokerage account at Monex Boom Securities in Hong Kong (www.boom.com). Hong Kong is the one place in the world at the moment where the yuan does trade freely. Boom allows customers to convert any currency into yuan and hold the Chinese currency in your account. This account pays no interest either. Nor is it FDIC insured, but then again, the FDIC has no jurisdiction overseas. Boom, however, is highly regulated in Hong Kong and has an exemplary track record.
In the spirit of full disclosure, neither I nor the Sovereign Society benefit from mentioning Boom or the Bank of China. We do, however, have an advertising relationship with Everbank and may receive a fee if you choose to work with them. But I would never recommend a product or service provider I didn’t fully believe in.
At the end of the day, few financial opportunities offer the kind of near-concrete assurances that go hand-in-hand with the yuan. China wants the yuan to rise in value against the dollar. And because it’s China, it’s all but certain to happen.
Until next time, keep a global view…
Jeff D. Opdyke
P.S. The China story is where the action is. The country’s new middle class is still taking shape … demanding access to clean water, clothing, TVs, housing and food. I call it the biggest investment opportunity of the next three decades. If you’re ready to go global with your portfolio, click here to get access to companies that most Americans never hear about.
Other Posts from the Author
- How to Get More Income from Your Investments - May 16th, 2012
- What My “Air-Route Indicator” Says About the Next Big Investment - May 11th, 2012
- Profiting from Asia’s Growing Thirst - May 9th, 2012
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