A long-term investment in the Chinese currency, the renminbi/yuan, is an investment with a much higher probability of profit than of loss. There are many factors working in favor of the yuan continuing to appreciate in value, and only a couple of very low probability risks associated with investing in the yuan on a long-term basis.
The Case for Investing in the Yuan
A basic overview of the current state and direction of the world economy is one major fundamental point in the yuan's favor. The Chinese economy is the fastest-growing emerging market economy worldwide, and it has overtaken the United States as the world's largest economy. China's lead as the world's number-one economy is only expected to increase over the next several decades. The emergence of China as the world's predominant economy will, in all probability, mean a yuan that is increasing in value in relation to the U.S. dollar and other major currencies. The simple, historical fact is the world's strongest economy is virtually always accompanied by the world's strongest currency. When the British Empire was the world's largest economy, the British pound was also the world's strongest currency. When the U.S. eclipsed Britain as the world's number one economy, the U.S. dollar became the preeminent and strongest currency in the world. It is simple economic logic, then, that argues in favor of the yuan becoming a stronger, more valuable currency as China becomes more and more the dominant world economy.
As of 2015, the International Monetary Fund (IMF) estimates the yuan is undervalued by approximately 40% in terms of purchasing power parity (PPP) with the U.S. dollar. Any currency that the IMF considers undervalued by nearly 50% should certainly pique the interest of any value investor. Of the euro, British pound, Swiss franc and the yuan, the yuan is the only currency that has appreciated in value against the U.S. dollar since the financial crisis of 2008.
Not even the People's Bank of China, China's central bank, actively intervening in 2015 to devalue the yuan by 4.1% is expected to significantly slow its appreciation in value. Although the move by China's central bank seemed to catch the financial markets by surprise, the fact is the 4.1% devaluation still leaves the yuan significantly higher in value relative to the U.S. dollar and other major currencies than it was at the turn of the century or as recently as 10 years prior. The yuan has been in a steady uptrend against the U.S. dollar since about 2005, and the 4.1% devaluation gave back very little, less than 10%, of its appreciation against the dollar over the preceding 10-year period. The IMF viewed the devaluation as a positive move that represented China simply further unpegging the yuan from the U.S. dollar and moving toward allowing the currency to trade freely and achieve a genuine market-dictated value. The move is likely to be no more than a minor and temporary upward retracement hiccup in a continuing bear market for the U.S. dollar against the yuan.
China has made a strong push toward getting the yuan recognized as a reserve currency. One of the elements in obtaining approval as a reserve currency is to allow the currency to be freely traded. China has gradually moved in that direction with such moves as making the yuan more freely available to foreign investors through the development of the currency in the Hong Kong market. China is also moving to continually expand yuan trading in other major Asian financial centers such as Singapore. The yuan is increasingly used in international transactions as China has established direct currency swap arrangements with many of its major trading partners, including Australia and the United Kingdom. As of mid-2015, it is ranked as seventh worldwide in currencies used. The yuan is also claiming a larger and steadily increasing percentage of the global debt market. At this point, it is difficult to imagine the yuan not eventually attaining the Special Drawing Rights (SDR) status of a reserve currency, and that eventuality is most likely to only strengthen the yuan further.
The yuan is further attracting investors as it becomes more commonly traded in the foreign exchange (forex) markets. As of 2015, there are nine currency pairs that include the yuan: the U.S. dollar/yuan, euro/yuan, yen/yuan, Hong Kong dollar/yuan, British pound/yuan, Australian dollar/yuan, Canadian dollar/yuan, Malaysian ringgit/yuan and Russian ruble/yuan. This is important because the more the yuan has an established value relative to another currency, the more Chinese businesses are able to manage trade settlement in their own currency without needing recourse for a third-party currency to facilitate exchange.
Yuan Risks Are Few and Unlikely
There are only a couple of low probability risks associated with buying the yuan as a long-term investment. The first is intervention by the Chinese central bank to purposely devalue the currency to boost exports. While it is possible the central bank may intervene now and then, any actions taken to decrease the value of the yuan are likely to be relatively minor and eventually erased by the currency's long-term appreciation in value. Additionally, such interventions by the Chinese central bank become less probable as China moves toward its goal of the yuan becoming a major reserve currency.
Another potential risk is a relative value currency war between the Chinese currency and other Asian currencies, such as the Japanese yen. This, too, is a low probability event given that other Asian economies are becoming less and less capable of matching the Chinese economy as it continues to expand at the rate of approximately 7% annually.
The least likely risk scenario is some utterly unforeseen event that completely derails China's economy and knocks it several rungs down on the world's economic ladder. While such an event could theoretically happen, the practical odds are strongly against such a possibility. The fact is there is nearly universal consensus China will be the largest and strongest economy in the world for the next half century or more.
Ways to Invest in the Yuan
There are a number of investment avenues available for a long-term investment in the yuan. The Bank of China in the United States offers savings accounts to U.S. depositors denominated in the yuan. Another possible investment area is the forex market, where more and more brokers are offering retail traders access to trading yuan currency pairs. There are also exchange-traded funds (ETFs) available that provide exposure to the yuan, such as WisdomTree's Chinese Yuan Fund that makes cash investments in the yuan and also invests in Chinese bonds. The five-year annualized return for this fund is 2.2%, closely matching the appreciation of the yuan over the same time period.
