Is the Chinese Yuan a Good Investment?

Hi Jerry, would it be wise to invest in the Chinese Yuan?

Thanks,
– T.R. (New Jersey)
 

T.R., thanks for the good question. Investing into the currencies of other countries can be an effective way to diversify your savings and investments. We have long used a basket of stable foreign currencies to diversify a portion of our savings. (Read more about our unique savings approach here.)

But what about the Chinese yuan? Is the Chinese yuan a good investment?

Over the last several years, China’s relentless economic growth has brought international attention to the Chinese yuan. China has the second largest economy in the world and while there are some important concerns about China’s excessive debt levels, the country currently enjoys low levels of unemployment and inflation.

Thanks to its tightly managed currency policy, the Chinese central bank has allowed the yuan to appreciate slowly and steadily over the past several years. For example, over the past decade, the Chinese yuan has risen by over 35% against the U.S. dollar and nearly 10% against the Euro.

Some may remember when the Chinese yuan was pegged to the U.S. dollar, which kept the currency artificially low. This gave the Chinese a tremendous advantage over the U.S. in global trade. Recently, China dropped its peg to the U.S. dollar in favor of a peg to a basket of global currencies including the U.S. dollar, the euro, the Japanese yen and the South Korean won.

There also seems to be a bit of confusion about the actual name of China’s currency as it is called both the “renminbi” and the “yuan.” The renminbi (RMB), which literally means “people’s currency” is synonymous with the “yuan” (sign: ¥). (This is similar to the British pound sterling… Is it a pound, or a sterling? It’s both, just two names.)

As China’s economic dominance continues to spread throughout the world, more countries are beginning to see the benefit of conducting trade transactions in the Chinese yuan. For example, Frankfurt (Germany’s financial capital) just announced it will be joining London, Singapore, and Hong Kong in issuing yuan-backed bonds.

Additionally, China has been rising in global payments usage. See the chart below, or click here.

As more of China’s global trade is settled in yuan, it will serve to strengthen the currency in the coming years. (It is expected that 30% of China’s cross-border trade will be settled in yuan by next year.) Some even expect the yuan to eventually be backed by gold, which would make the currency extremely attractive against its fiat-based competitors.

Regardless, we expect the yuan to be one of the world’s top currencies and fully convertible sometime before the end of this decade. Therefore, I believe the yuan can serve as a potential hedge against the U.S. dollar for both saving and investment purposes.

However, it is always important to check the overall trend of any currency before investing. Consider the following chart of the Chinese yuan.

Prior to the beginning of 2014, the yuan had been rising slowly and steadily against the U.S. dollar and in January of this year the yuan reached a 20-year high against the U.S. dollar.

However, since peaking out in January the yuan has been moving lower against the U.S. dollar. This has been due to some policy shifts being made within China’s economy. Last February, China’s central bank began aggressively pushing the currency lower in an effort to stamp out speculators who were betting on the currency’s continual rise. The central bank became so aggressive that it “ordered major state-owned banks to buy dollars and dump yuan.”

Put simply, it may be wise to wait for China’s central bank to finish its widespread campaign against “speculators” before buying the currency.

Each month, FTMDaily’s Global Currency Monitor tracks and rates nine global currencies, including the Chinese yuan. We update these ratings every month for our subscribers. Our Global Currency Monitor is a currency rating system for those seeking to diversify away from the U.S. dollar. This service simplifies the selection process of currency investing, helping you buy the right currency… at the right time.

You can learn more here, or by watching the 60 second video below.

Until tomorrow,
Jerry Robinson

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