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The Chinese Yuan

The Yuan is the currency of mainland China and the base unit of the entire Chinese money system, the Renminbi (RMB).  Coins in circulation at this time are one Yuan, five Jiao and one Jiao; ten Jiao is equal to one Yuan.  Banknotes start at one Yuan and go up to 100 Yuan. 

The Yuan became China’s currency shortly after the Communists took over mainland China in 1948.  The Renminbi currency system translates literally as “the peoples’ currency”.  At that time the country was suffering massive inflation and the new currency stabilized the economy.

China’s Yuan has been very stable currency but it’s currently very undervalued.  In fact, some estimate that it’s undervalued by as much as 20-40%.  China uses an exchange rate system that is fixed and keeps it Yuan in a narrow rate of around 7 Yuan to the dollar.  They do this by buying dollars as equal as possible to its trade surplus with the US, which is more than $200 billion per year.  To prevent this money from causing inflation they sell bonds to Chinese investors and commercial banks.  The bonds pay around 4% interest; they use the money from the sale to buy US treasury bonds that pay less than 2%.  It loses money on US bonds while they help finance the US trade and budget deficits and keep US interest rates low.  China accepts these losses because this system allows them to create new jobs in their export industries. 

The Yuan is expected to increase 5% against the dollar over the next year as China moves towards more flexibility in their currency; the Yuan was recently unpinned from the US dollar to help China in this quest.  Although China controls its appreciation at less than 7% per year, it is projected to rise because China needs to battle imported inflation while commodity prices surge. 

Many respected financial investment experts expect the Yuan to become a major reserve currency and possibly the world reserve currency.  The fact that the economy of China is projected to overtake Japan’s as the world’s second largest economy makes this a good time to invest in the Yuan.  It may be a good time to contact a broker and ask about exchange-traded funds (ETF) that include the Yuan.

Another way to invest in the Yuan is to buy Chinese stocks.  Consumer goods stocks would be particularly profitable.  Chinese stocks will undoubtedly increase in value as the Yuan grows stronger.  You can also open an account with the Bank of China, which now allows US clients to deposit up to $20,000 annually.  This bank has branches three branching in the US, located in both New York and Los Angeles.

 

Sources:

http://articles.sfgate.com/2009-02-15/opinion/17187721_1_china-s-central-bank-yuan-interest-rates

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aPsA0yLwX18c

http://economictimes.indiatimes.com/markets/forex/Yuan-up-as-bank-clients-sell-dollars-outlook-murky/articleshow/6934141.cms

http://www.savingtoinvest.com/2008/05/us-dollar-outlook-2008-2009-and-beyond.html

http://www.getmoneyenergy.com/2010/03/investment-strategy-should-change-if-yuan-becomes-reserve-currency/

http://commoditybullmarket.blogspot.com/2011/01/why-jim-rogers-loves-chinese.html

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Modified:03/24/2011
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