How to Invest in Renminbi

Apr 17, 2010 by

My analytics reveal that the most popular query that leads people to this blog on Google is “invest in renminbi“. Unfortunately, the blog entry that was presented at the top of the search results was merely about currency arbitragein general, and gave the reader no real guidance on how to invest in renminbi.

The renminbi (??? “The People’s Currency”), also known as the Chinese Yuan, is the official currency of the People’s Republic of China. Different currencies are used in Hong Kong (the Hong Kong Dollar) and Taiwan (the New Taiwan Dollar). Fittingly, all paperdenominations of the renminbi bear the likeness of Chairman Mao. At the time of writing (April 17th, 2010), a U.S. dollar was worth 6.82 renminbi. So, the 100 renminbi note (the largest paper denomination) was worth $14.65.

100 Renminbi Note

100 Renminbi – The Largest Denomination

The renminbi is very different from most foreign currencies in that the People’s Bank of China carefully regulates the exchange rate by limiting the exchange of the renminbi for other currencies. Until 2005, the value of the renminbi was pegged to the value of the dollar at a fixed exchange rate. Now, the renminbi is allowed to float around an exchange rate that is determined by the value of a basket of currencies. The exchange rate is not entirely determined by the market, and the People’s Bank of China actively intervenes to maintain the stability of the exchange rate. There has been recent talk of the government further loosening restrictions, and allowing the renminbi to further strengthen. (Over the past five years, the renminbi has strengthened from 8.11/$at the 2005 depegging to the 6.82/$ that it is today.) If an American buys renminbi and the renminbi strengthens relative to the dollar, he will make money if he exchanges his renminbi back for dollars.

As my prior entry on currency arbitragementioned, there are substantial transaction costs to buying and selling currencies. One way to get around it is to buy ETFs that have a linkage to the renminbi; Market Vectors Chinese Renminbi/USD ETN (CNY) and WisdomTree Dreyfus Chinese Yuan (CYB). Although they sound similar, they are not interchangeable. Looking at their summaries reveals the difference.

CNY:

The investment seeks to replicate, net of expenses, the S&P Chinese Renminbi Total Return Index. The index tracks the value of the Chinese RMB relative to the U.S. dollar. It follows the value of non-deliverable, three-month currency forward contracts that are rolled at three-month intervals and includes daily accrued interest.

CYB:

The investment seeks to achieve total returns reflective of both money market rates in China available to foreign investors and changes in value of the Chinese Yuan relative to the U.S. dollar. The fund normally invests in a combination of U.S. money market securities with forward currency contracts and currency swaps which is designed to create a position economically similar to a money market security denominated in Chinese Yuan. The average portfolio maturity is 90 days or less. It does not purchase any money market securities with a remaining maturity of more than 397 calendar days.

So, CNY is tied to the exchange rate, while CYB is tied to the money market rates. Furthermore, the expense ratios are different, with CYB at .45% and CNY at .55%. So, CYB is mildy cheaper. Movements of the two ETFs are not perfectly correlated. If you are interested in investing in renminbi, CNY and CYB offer two potential options. Full disclosure: I have holdings in both CNY and CYB.

4 Comments

  1. Superman

    I dont follow the finance jargon.. .Only know business basics.. If I beleive yuan will be stronger relative to dollar – will CNY go up or down ? (i.e. positively correlated or negatively related) 🙂

  2. Adam Powell

    When the Yuan strengthens relative to the dollar, 1 Yuan buys more dollars than it did in the past. So, if 1 Yuan used to be worth 12 cents, and it strengthened, it might now be worth 15 cents. From an American perspective, the strengthening of the Yuan would mean that one dollar would buy fewer Yuan.

  3. Advo

    Any possibility of in Yuan against Euros?

  4. Adam Powell

    Well, I believe that Europeans can buy these ETFs as well. You simply have to trade your Euros for dollars, and then your dollars for these securities. There might be something equivalent available in Europe, but I am not aware.

Leave a Reply

Your email address will not be published. Required fields are marked *