Posted in Forex | March 26th, 2008 | by Jordan
The Yuan or Renminbi is the Chinese currency and might as well be the next hot investment. The run into metals, commodities, oil and the Eurozone has brought huge gains to those areas, but the Chinese Yuan is something that has yet to be exploited.
The Renminbi was subject to a peg to the dollar for decades. The old peg was valued at about 8 Renminbi to one US Dollar and was in effect to keep a low Chinese currency value. If the currency was always devalued against the dollar, US consumers would look first to China for the production of goods. Thus so many “Made in China” stickers appear on virtually everything you own. The drop in the dollar’s value went unnoticed against the Yuan because its always been pegged to the US Dollar. Never has it been allowed to free float against the USD so its value has remained the same. Lately, the Yuan has been on top of the headlines as the main reason for the large trade deficit between the United States and China.
Now that the economy is on the forefront of political discussion it has been made public that US legislators are looking for a way to let the Yuan free-float against the value of the dollar to bring back the manufacturing base to the United States. The currency is being artificially devalued in an attempt to keep China’s booming manufacturing district, well, booming.
One proposal was to create an import tax on Chinese goods to make them more expensive to US consumers and thus, force companies to send the manufacturing jobs back home. In response, China allowed its currency to now float against a “basket” of different currencies including the pound, euro, and 6 other large currencies. At the font of the basket is around a trillion dollars worth of US Treasuries which has for the most part maintained the value of the Yuan to about 7 Yuan to the dollar.
If the market were to let the Reminbi free-float, an instant 30-40% correction is expected. Economists predict that the value of the Yuan would jump quickly to 4-5 Reminbi to the dollar, instead of today’s value of around 7 to the dollar.
It is certain that the Yuan will eventually be set to free float. The new tax legislation and pressure from the rest of the world to go to a floating currency will eventually send China to let the currency float. When it does, huge overnight gains will occur for anyone with a position in the Chinese currency.
Everyone should have some exposure to the currency market by making a direct investment into the currency, buying Chinese stock such as Petrochina or taking a position on the spot markets. I would recommend making an investment on the spot markets through Oanda forex. With Oanda, it is possible to enter a position at 30:1 leverage, meaning it will only cost $100 to control $3000 of currency. A modest investment of $1000 to buy $15000 in Reminbi would be suggested as this provides a position against the currency and provides a great return if the Reminbi does get revalued.
A move from 7:1 to 5:1 would mean that the value of your investment ($1000) would turn into $5500 if the currency was revalued to 5 Yuan to the dollar. Using $1000 to buy $15000 in Reminbi has a huge upside potential with the only possible loss of $1000. Get in, its inevitable.
