How to Buy Renminbi

Nov 13, 2011 by Adam C. Powell, Ph.D.

Numerous articles have been written about how the Chinese Renminbi (also known as the Chinese Yuan) is undervalued, relative to the U.S. Dollar. The exchange rate is somewhat controlled by the Chinese government, and is believed to be undervalued.

As this graph shows, between late 2006 and late 2011, a dollar went from buying over 7.8 renminbi to buying less than 6.4. Simply buying and holding renminbi would have caused a person to have a nearly 22% gain. While there are some risks in investing in the renminbi, for people determined to do it, holding actual renminibi is probably the safest approach. ETFs that supposedly mirror the renminbi are often somewhat synthetically constructed, and do not match the exchange rate perfectly.

While obviously, a person could go to China, buy some renminbi, and then carry it back to the United States, there is a heavy transaction cost associated with that. Also, conventional banks charge currency conversion fees of around 2-3% for each conversion. So, converting money in China and carrying it back is not a great way to convert.  Making matters worse, the largest renminbi bill is worth only about $15.50!

To efficiently save money in renminbi, the best thing to do is to open a renminbi-denominated bank account with the Bank of China’s New York Branch. To do this, all you need to do is to fill out the materials attached to this blog post, and to mail them to:

Bank of China NY

Banking Dept.

410 Madison Ave,

New York, NY 10017

Every document must be notarized before you send it. You will also need to send a notarized copy of your credit card (the card – not your statement) and driver’s license. The bank will require you to keep a minimum of $500 in U.S. dollars, in addition to the money that you convert to renminbi. At the time of writing, it appears that the bank will charge a fee of .05 renminbi per dollar converted. So, if the exchange rate is 6.35 renminbi to the dollar, they will give you 6.30 renminbi for your dollar, and they require you to pay 6.40 renminbi to get your dollar back. Compared to the 2-3% that banks will charge you in China to use your ATM card and get renminbi, this .7% conversion fee is quite cheap. While using a bank account makes converting money easier, it is important to remember that the Chinese government only allows the conversion of up to 20,000 renminbi per person per day (slightly over $3,000). So, it is difficult to rapidly convert large sums of money to and from the renminbi. Nonetheless, converting some money can serve as a nice hedge against the dollar.

If you don’t want to visit the Bank of China’s New York Branch, you can just mail in the materials. Getting things notarized is easy – just take the documents to a bank near you and ask them if they have a notary. Many banks will notarize documents for free.

Over time, if the renminbi continues to strengthen against the dollar, the value of renminbi-denominated bank accounts will grow when considered in dollar-denominated terms. Given that the Bank of China’s New York Branch is FDIC insured, this investment strategy allows you to place a bet on the renminbi/dollar exchange rate without taking any other additional risks.