Chinas Inscrutable Currency Strategy

Purpose: Expose China Opportunities for Smart Investors The move by Chinas central bank to drop the yuans rigid peg to the dollar last week on the day of my return after a three-week trip to Asia left a host of questions unanswered. The basket of currencies that will allegedly determine the value of the yuan going forward was not disclosed. What sort of band the currency will be allowed to fluctuate within is not at all clear. The % revaluation in the currency on Thursday followed by a slight strengthening on Friday week may actually encourage further short-term speculation since most economists believe the yuan is undervalued by roughly % to %. With $ trillion of trade transactions each year and hot money capital inflows equivalent to % of its GDP, the uncertainty concerning the Chinese currency is high. Not In the Mainland In the near term, this uncertainty gives investors an opportunity to benefit not just from the expected strengthening of the Chinese currency but the overall rise of Asian currencies against the dollar. In early , I advised clients that the Euros rise against the dollar was over and that Asian currencies would be the next area to appreciate versus the dollar. It may turn out that many of your best China investment options dont involve investing in mainland Chinese companies at all. Direct Currency Approach The cleanest direct currency play on the expected rise in the yuan (also referred to as the renminbi) is to open a renminbi currency account at Everbank. A leading online bank ranked Best of the Web by Forbes, Everbank offers a variety of world currency accounts as well as FDIC backed three and six month CDs which offer attractive rates. Direct iShare Approach Another direct equity China play is through the China iShare (FXI) that tracks the FTSE/Xianhua China index that is comprised of of the largest and most liquid China names. FTSE is a UK based index company and Xianhua is a China based media company. All of the stocks included in the China iShare are listed on the Hong Kong Stock Exchange. Some of them are incorporated in mainland China (H shares) and some of them are incorporated in Hong Kong (red chips). The total market capitalization of the index is $ billion. The broadest Xinhua China index includes , listed companies with a total market cap of $ billion. To put this in perspective, the average market capitalization for a company in the S