October 18, September 16, June 30, March 31, February 23, Recommended for you. Email address. Already a subscriber? Sorry, your blog cannot share posts by email. China Weekly Briefing Sign up for your complimentary subscription to our weekly newsletter here. And since then the yuan has been strengthening very consistently. So what's going on and what does it mean for your money? There are few factors driving the stronger yuan. One is that Chinese assets offer much higher interest rates than US and European ones.
That means China is attracting capital which will drive up its currency. Investors have also noticed that the Chinese authorities — who still closely monitor and manage the currency — don't seem to be too concerned about its current strength. So they're more willing to bet on the currency strengthening still further.
As we've pointed out here countless times, all else being equal, a weaker dollar is good news for risk assets in general. In effect, it means that liquidity is plentiful and everyone can get hold of all the dollars they need easily the US dollar is the global reserve currency, so everyone needs it. The question is: what does it mean for your money? You can decide whether investing in China is something you want to do. And you only have to look at the slapdown Jack Ma took last year , with the scrapping of the Ant Financial IPO , to understand that when push comes to shove, the Communist party is in charge yes, America is tiptoeing around Jeff Bezos in a similar manner right now, but both the balance of power and the institutional protections make it an entirely different matter.
That said, some smart people reckon that Chinese sovereign bonds represent a good addition to a portfolio. However, as far as broader markets go, the biggest point to understand about a stronger yuan is probably this: if a weaker yuan is deflationary, a stronger yuan is inflationary. 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. 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.
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. Investors must convert funds back to U.
As long as they hold money in these accounts, investors benefit from any appreciation in value in the Chinese currency. 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. 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. 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.
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. The fund aims to mirror the performance of Chinese interest rates and the value of the yuan relative to the U.
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.
In China, the central bank has been injecting billion yuan into the financial system daily through open market operations this week, resulting a in a net injection of 60 billion yuan so far this month, compared with a net drain of billion yuan in October Asian Currency News Updated. By Reuters Staff 4 Min Read.
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