As the Chinese yuan continues to appreciate in value, 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. As of 2015, investors have several basic yuan investment options: to purchase yuan directly and hold cash in that currency, to invest in exchange-traded funds (ETFs) or exchange-traded notes (ETNs) that are designed to reflect the performance of the yuan, and to purchase yuan currency futures contracts or buy the yuan against the dollar in the foreign exchange (forex) market.
The Case for Investing in the Chinese Yuan
Despite a recent devaluation by the Chinese government, the yuan has appreciated in value against the U.S. dollar by more than 25% since 2005. The consensus outlook among market analysts is that the yuan will continue to outperform other major currencies.
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 and is expected to be recognized as one of the world's major reserve currencies. 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.
According to HSBC Bank, the percentage of emerging market trade transactions settled in yuan exploded to approximately 50% in 2015 from less than 5% in 2010. The Wall Street Journal reported in 2013 that the yuan had already surpassed the yen and the euro in global trade financing, and China continues to establish direct currency swap agreements with major trading partners, thereby undercutting the U.S. dollar's position as the world's reserve currency.
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 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.
EverBank, through its WorldCurrency Access Deposit accounts, also offers the opportunity to establish a bank account denominated in yuan. The EverBank accounts require a minimum $2,500 opening deposit. They are IRA-eligible and charge no account fees. As with other money market accounts, there are limits on the number of monthly transactions. As long as the yuan remains a non-deliverable currency, withdrawals can only be made in U.S. dollars.
Investing in the Yuan through ETFs or ETNs
Another way to invest in the yuan is through 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 accord with the yuan, a generous 3.53% dividend yield and potential capital gains resulting from increased bond values. Altogether, an investor could possibly realize annual returns of more than 10% on this fixed income fund.
The most widely traded Chinese Yuan ETF is the WisdomTree Dreyfus Chinese Yuan Fund. The fund aims to mirror the performance of Chinese money market 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. The underlying index is composed of rolling three-month non-deliverable currency forward contracts on the yuan/U.S. dollar exchange rate.
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. Yuan/renminbi currency futures are traded on the Chicago Mercantile Exchange (CME) under the symbol RMB. Futures options on the yuan are also available.
A limited number of forex brokers offer trading in the U.S. dollar-yuan currency pair (designated as USD/CNY), but the number of brokers offering the pair is expected to increase steadily as the yuan becomes more freely traded overall.
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.