How To Invest In The Chinese Yuan Despite The Strict Control Over The Currency
China is currently one of the leading countries in terms of economic performance. The country’s GDP in 2020 was $14.72 trillion (Source: Statista), which was notably lower than the U.S GDP at $20.93 trillion. The country seems determined to overtake the U.S to become the leading economy, and analysts believe this might happen within the decade.
China’s growth is primarily supported by its industrial and trade prowess, including developing an extensive trade network. These measures will likely continue strengthening the country’s economic performance, which will boost the Chinese Yuan’s performance. Therefore, there is a strong incentive to invest in the Yuan.
Unfortunately, investing in the Chinese Yuan is not as easy as investing in many other currencies because it has strict capital control measures. This limits the Chinese Yuan’s flow in and out of the country, which means that the currency is not freely accessible or traded in the open market like many other currencies. However, there are ways in which traders can access the Chinese Yuan.
Investors can take advantage of leveraged investments such as the forex market and currency futures to maximize their investment. Yuan or Renminbi currency futures can be accessed via the Chicago Mercantile Exchange, where they are traded under the ticker RMB. The trading platform also provides futures based on the Chinese currency.
Futures are a speculative tool for investors who want to make money through forex and commodities. However, they are standardized and have an expiry date, which means there is a significant risk involved, but the potential rewards are also high. The high-risk levels are why only a few brokers allow the trading of yuan-based pairs such as the USD/CNY. However, those that offer CNY currency pairs urge traders to make sure they are willing to embrace the higher risk profile.
ETFs and ETNs
Exchange traded funds (ETFs) are a great way to invest in the Chinese Yuan. Some ETFs, such as the Invesco Chinese Yuan Dim Sum Bond Portfolio Fund, are tied to the Chinese currency’s performance. The Dim Sum fund puts its money in yuan-denominated bonds called dim sum bonds that are available beyond mainland China’s borders.
The fund has various benefits, such as a healthy dividend yield that ranges between 3.50% and 4.00% annually and capital appreciation. The dividends are offered in cash payments offered to investors when they invest in a stock, fund, or security.
Another popular yuan-based ETF is WisdomTree Dreyfus Chinese Yuan Fund which mirrors the value of the Yuan against the U.S dollar while keeping track of Chinese interest rates. Another example is the Market Vectors Chinese Renminbi/USD ETN, which reflects the Yuan’s performance against the U.S dollar. This particular ETN tracks the S&P Chinese Renminbi Total Return Index.
ETNs are exchange traded notes that invest in stocks and other assets. For example, the Market Vectors ETN invests in non-deliverable three-month rolling currency forward contracts based on the Yuan vs. dollar exchange rate. Forward contracts are used to exchange three currencies by locking in a currency’s exchange rate as per the agreement between two parties. They agree on a future currency pair price for the settlement of the contract.
Directly buying the Yuan
One of the most common ways to own a currency is to exchange a local currency’s value in exchange for a currency of a different country. This commonly happens when people travel from one country to another, and it has obvious advantages. For example, if you are traveling from the U.S to China, you will need to buy some yuan which will be important for transaction purposes, such as when shopping in a foreign land.
The exchange is possible because countries usually hold foreign currency reserves through their central banks to maintain a good balance of trade. Buying a foreign currency can be done in a forex bureau or at a bank. Many banks offer foreign currency accounts where locals can hold their money in a foreign currency.
There are multiple reasons for which an individual or corporate would want to have a foreign currency account. Many businesses that import goods from China would subscribe to such a service to avoid exchange rate fees or exposure to currency value losses, especially if their local currency is highly volatile. Another reason would be to take advantage of foreign currency gains in the Yuan. This option would be ideal for anyone who wants to tap into the Chinese Yuan’s gains as the country continues to grow and gain value.
TIAA Bank in the U.S is a great example of a bank that offers foreign currency accounts called WorldCurrency Access Deposit accounts. Customers can subscribe to this service and secure a Yuan account, but there is a minimum deposit amount requirement of $2,500 to open such an account. The account may be subject to a monthly maintenance fee.
There are also other considerations to keep in mind. For example, you might not be able to withdraw the funds in Chinese Yuan as long as it is a non-deliverable currency, but you can withdraw the money as dollars. There will be a currency conversion charge to consider, which may eat into your currency gains.
There is no shortage of reasons for wanting to own a foreign currency. However, some currencies, such as the Chinese Yuan, have more compelling reasons than others, simply because it is a currency backed by a strong and rapidly growing economy. Purchasing the Yuan can thus be viewed as investing to take advantage of the country’s growth.
Investing in the Chinese Yuan can also be viewed as a risk diversification strategy considering the growing economic pressure against the U.S dollar. The Yuan is becoming increasingly attractive, and perhaps it will become more accessible in the future, which means that now is the best time to invest in it.