Invest In China

Yuan Action—Or, Why You Might Want To Open A Chinese Bank Account

“I can remember when a dollar bought 400 Japanese yen,” writes Retirement Planning Correspondent Paul Terhorst. “Years later I traveled to Japan on business and a dollar bought only 200 yen. The yen continued to go up, and today a dollar buys only about 80 yen.

“In the 1970s, ‘Made in Japan’ meant cheap, shoddy goods. Exports to the United States back then included rubber flip flops and low-end cars. Japan gradually moved upscale. Today ‘Made in Japan’ means smaller, prettier, lighter, easier, stronger, better.

“I see a similar evolution in China. I expect that, in a few decades, ‘Made in China’ will stand for quality rather than toys at Walmart. I expect the Chinese yuan to go up, just as the yen went up in Japan.

“I suggest you consider getting a piece of the yuan action.

“I could be wrong. A thoughtful, savvy friend says he expects China’s rulers to make mistakes. Japan had the advantage of a working democracy, however flawed. Electoral feedback combined with market response gave Japan better tools during the tough times. China remains a dictatorship, its rulers supreme, its democratic forces carefully controlled.

“Still, and even if we see some mistakes, I believe a rising yuan comes as close to a sure thing as we have in the investment world.

“Today a dollar buys a little over 6 Chinese yuan. For now, those yuan have only limited convertibility to other currencies. For now, if you have yuan, you probably want to spend those yuan in China. Still, even with the restrictions, I expect the yuan to continue to rise against the dollar, perhaps to 4 or 3 or even higher. The Chinese like to keep us all guessing, but it looks like for now they’re revaluing the yuan at about 5% a year. I expect 5% or so to continue for a while, and then I expect a pop as the Chinese move to full convertibility.

“You have several ways to play the Chinese yuan. You could buy one of the Chinese stock ETFs (exchange-traded funds). Those funds, like FXI and GXC, own China’s largest, most stable companies: China Mobile, Bank of China, CNOOC, and so on. With these ETFs you get both the yuan and the Chinese stock market. If the yuan goes up as I predict, those Chinese stock values will convert to dollars at higher and higher amounts.

“FXI and GXC and other China funds present stock risk. I suspect now might be a good time to buy Chinese stocks. Then again volatility these days keeps all stock buyers on edge. You may prefer a pure yuan play rather than stocks. Also, with these China stock funds, you keep your money in the United States. This means you’ll be subject to U.S. capital controls when you move your money abroad, to buy a house, for example, or for living expenses.

“For a pure yuan play, you could buy a Chinese yuan tracker, for example, CYB. Because the Chinese restrict trading in the yuan itself, CYB uses derivatives to track the yuan. With CYB you have what amounts to a yuan money market account. Unfortunately those derivatives present risk and cost a lot of money. The yuan trackers tend to have high transaction costs. And again, you keep your money in the United States, where it is vulnerable to an ever-more-hostile U.S. government that wants you to stay in the United States and to spend dollars in the United States.

“Perhaps the best alternative is to open a bank account in China. This would mean a trip to China, but I see that as a more of a plus than a minus.

“In many countries, banks are refusing to work with U.S. citizens. That’s because the U.S. government makes life miserable for banks that do such business, with reporting and other requirements.

“But, for the time being, Bank of China welcomes all comers, even Americans, and even U.S. dollars. In China, the Bank of China has a number of managers who speak fluent English and who can help you open an account. Just present a passport and some money, preferably traveler’s cheques, to get started. The bank will convert the money to yuan, put the yuan in your account, and give you an ATM card. The ATM card says ‘Only for use in China,’ which means you’ll have to return to China to get your money. The Bank of China will also set up Internet access in English so you can check your account online.

“The Chinese impose limits on how much yuan you can buy, currently about US$5,000 per day for retail customers. If you deposit, say, US$50,000 in traveler’s cheques you’ll have to go back to the bank 10 times to convert that money to yuan. You may be able to convert online, if not now, then in the future.

“One quirk: The Chinese seem to offer only individual, rather than joint accounts. I asked about what happened if the account-holder dies. The manager laughed at me. Apparently Bank of China customers never die.

“All over China you can use your U.S. ATM (debit) cards to withdraw money from Chinese ATMs. For now Chinese ATMs limit you to 2,500 yuan, or about US$400 per withdrawal. If you have several U.S. cards, you could withdraw, say, US$2,000 worth of yuan a day while traveling around China.

“You could then deposit those funds into your Chinese bank account.

“Once you’ve converted to yuan, you can keep the money in a current account to use while traveling, either now or later. You can also put yuan into time deposits, for example, one-year CDs. The CDs pay 1% to 3% interest, which, added to the yuan appreciation of 5% or so, makes for a decent return.

“As I said, I expect the yuan to appreciate. I also expect the yuan to become fully convertible. For now your ATM card works only in China. For now you can access your China bank account money only in yuan. But, once the yuan becomes fully convertible, you’ll be able to exchange yuan back to dollars or any other currency. Partial convertibility via Hong Kong has already arrived. Open a bank account in Hong Kong and you can convert yuan to Hong Kong dollars, a fully convertible currency that you can easily exchange to pesos or ringgits or whatever currency you need to spend.

“The point is: China will change its banking rules, its exchange rules, and its capital rules as the yuan strengthens and becomes a world currency. As a guess, I’d say the yuan will become fully convertible within two to five years.”

Kathleen Peddicord

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