As the Chinese economy becomes a more dominant player in international trade and the yuan continues to gain more acceptance, more and more investors are looking for ways to obtain exposure to the Chinese currency. While the yuan is still somewhat pegged to the U.S. dollar and not yet altogether freely traded, it is approaching that status quickly and becoming more readily accessible to investors. Investors have several yuan investment options, including purchasing yuan directly and holding it in cash, investing in funds that hold the Chinese yuan, and buying yuan futures contracts. However, there are nuances to each investment.
As the Chinese economy continues to expand, the yuan is gaining greater acceptance worldwide.
Investors can take positions in the yuan by opening a savings or deposit account with U.S. dollars, but the account is denominated in yuan.
Investors can also buy exchange traded funds (ETFs) designed to mirror the performance of the Chinese currency.
The Case for Investing in the Chinese Yuan
From 2015 to 2020, the devaluation of the yuan by the Chinese government has accelerated from approximately 6.20 yuan-to-the U.S. dollar (USD) in 2015 to more than 7.10 in 2020.
As the Chinese economy continues to expand, rapidly moving China from its status as the premier emerging market economy toward being the world’s number one economy overall, the yuan is gaining substantially greater acceptance worldwide. China’s commitment to attaining a more prominent position in the global financial economy is reflected in the establishment of the Asian Infrastructure Investment Bank (AIIB) and the Contingent Reserve Arrangement, a sort of mini-IMF for the Asia-Pacific region.
Further bolstering the status of China, the International Monetary Fund (IMF) added the Chinese renminbi to its list of reserve currencies to be used, in part, for central bank transactions.1 The renminbi and yuan are often used interchangeably as the currencies for China, but the renminbi is considered the official currency of China. The yuan is used to facilitate global and financial transactions and is typically used offshore–outside China–while the renminbi is more frequently used in China–onshore.
Other currencies that are considered reserve currencies include the U.S. dollar, the euro, the British pound, and the Japanese yen. The elevation of the renminbi’s status allows it to be used more frequently in global trade and international financial transactions.
However, the Chinese government still controls the value of the yuan and renminbi exchange rates and has capital controls in place, which prevent Chinese investors from moving money out of China. Until China can freely float its currency and allow the free movement of capital investment in and out the country, it’s unlikely that the yuan or renminbi will replace the U.S. dollar as the world’s reserve currency. Reserve currencies are used to price commodities, such as gold and crude oil, as well as facilitate global trade transactions in developing countries that have less stable currency regimes and financial systems. Nevertheless, it’s fair to say that the Chinese currency is on the path to becoming a larger player in international transactions.
Holding Cash in Yuan
The Bank of China has branches in New York, Chicago, and Los Angeles where investors can open savings or high-yield time deposit accounts with U.S. dollars but are denominated in yuan. Investors must convert funds back to U.S. dollars to make withdrawals. As long as they hold money in these accounts, investors benefit from any appreciation in value in the Chinese currency.
TIAA Bank, through its WorldCurrency Access Deposit accounts, also offers the opportunity to establish a bank account denominated in yuan. The account requires a minimum $2,500 opening deposit. They are IRA-eligible, and a monthly maintenance fee may apply. As long as the yuan remains a non-deliverable currency, withdrawals can only be made in U.S. dollars. However, currency conversions will typically be charged a 1% spread, which is built into or added to the exchange rate conversion.2
Investing in the Yuan through ETFs or ETNs
Another way to invest in the yuan is through exchange traded funds (ETFs) designed to perform in accordance with the value of the Chinese currency. One is the Invesco Chinese Yuan Dim Sum Bond Portfolio Fund. This ETF is invested in a portfolio of dim sum bonds, which are issued outside of mainland China but are nonetheless denominated in the yuan. The fund offers capital appreciation in accordance with the yuan, a generous dividend yield that can range from 3.50% to 4.00% per year. Dividends are typically cash payments made to investors as a reward for investing in a security, fund, or stock. The fund also offers the potential for capital gains resulting from increased bond values.
One of the most widely traded Chinese Yuan ETFs is the WisdomTree Dreyfus Chinese Yuan Fund. The fund aims to mirror the performance of Chinese interest rates and the value of the yuan relative to the U.S. dollar. There is also the Market Vectors Chinese Renminbi/USD ETN, which looks to reflect the overall performance of the yuan in relation to the U.S. dollar by tracking the S&P Chinese Renminbi Total Return Index. An ETN is similar to an ETF except ETNs typically invest in other assets besides stocks. The underlying index for the Market Vectors ETN is composed of rolling three-month non-deliverable currency forward contracts on the yuan/U.S. dollar exchange rate.
Forward contracts allow two parties to exchange two currencies by locking in the pair’s exchange rate today for settlement at some point in the future. The initial forward contract is offset or unwound when its settlement date comes due. The difference in the exchange rates between the original forward and the offsetting trade is the gain or loss from the currency exchange rate movements. The net difference is typically settled in dollars, and no yuan changes hands.
Yuan Currency Futures and Forex Trading
Investors wishing to maximize investment in the yuan through the use of leveraged investments may consider currency futures or forex market trading. Leveraged transactions use borrowed funds to enhance the gains or returns on an investment. However, just as leverage can magnify gains, it can also magnify losses.
Yuan/renminbi currency futures are traded on the Chicago Mercantile Exchange (CME) under the symbol RMB. Futures options on the yuan are also available. Futures are derivatives since they derive their value from the underlying investment. Futures contracts can be used to speculate on currencies and commodities. However, futures have preset expiration dates and are standardized unlike forward contracts, which allow customized amounts and settlement dates.
A limited number of forex brokers offer trading in the U.S. dollar-yuan currency pair (designated as USD/CNY). Since these types of investments are highly leveraged, they are only appropriate for investors who are willing to accept the higher level of risk that accompanies the substantially higher level of potential return.