Safest Currency Bet with Low Risk Remains the Yuan

China’s currency is probably the best risk-adjusted play for low risk currency investors over the next ten years and beyond. Its gradual appreciation since July 2005 when the central bank raised its trading band has delivered consistent returns for investors. Over the last three years, the yuan has risen a cumulative 16.9% against the dollar.

Under immense foreign policy pressure from its largest trading partners in the European Union (EU) and the United States to revalue its yuan, China’s currency is probably one of the most undervalued in the world. The country sports a bulging $1.5 trillion dollar war chest in the form of foreign-exchange reserves, massive trade surpluses with its largest trading partners and a high savings rate among the Chinese. In fact, the People’s Bank of China, loaded with dollars, can easily absorb several sub-prime shocks with ease with its vast surpluses, unlike the United States.

Although the Chinese yuan and its sister, the remninbi, are not convertible, many banks have started offering synthetic products tied to the notional value of these units wrapped into derivative-based offerings. One of the first banks to offer a Chinese currency is St Louis-based Everbank ( Requiring a $20,000 minimum investment, this account provides low cost access to the Chinese yuan along with FDIC deposit protection insurance up to $100,000.

Another avenue available to buy the Chinese unit is through the recently listed Market Vectors Remninbi ETF or CNY.

One of the easiest ways to buy an undervalued Asian basket of currencies is the Sovereign Society’s Asian Currency Portfolio. This product, which includes the yuan, Singapore dollar and several other units offered at Everbank, has risen 10% since last August.

Offshore, I can’t find one bank that offers an equivalent product – at least not yet. Dutch bank, ABN Amro, however, offers a Chinese yuan certificate to offshore investors but its correlation with the underlying currency is poor. I’d avoid that product.

China, however, will suffer the consequences of high inflation and a real estate bubble in most cities at some point. This is consistent with soaring inflation across the region – now at a 9 ½ year high accompanied by rising wages. The dual currency system will also have to merge eventually and become fully convertible. But despite these travails and short-term market shocks, the Chinese economy remains on the road to greatness, similar to the United States over 150 years ago and the United Kingdom in the 18th century. In my book, the Chinese yuan and remninbi are a long-term “buy” for all investors.

Have a nice weekend.

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