Monday, August 15, 2005

A student of mine wrote to me that he thought his parents should invest in the yuan given the impending revaluation and what I said on my blog! Please! no, don't throw mom and dad's money away based on what I may or may not say in this blog. Okay if you want to know the right way to do it, here is my two cents, but I am not responsible for any losses!!

On the yuan, I looked into it myself. There are two ways. First, you can take US dollar and try to open up a bank account in Hong Kong, which is what I had planned to do. But to do that, you will need a HK ID card and proof of HK residency, and I found that it isn't really worthwhile anyway. The HK accounts pay really low interest rates (try 0.7%) in anticipation of the revaluation and frankly, the Chinese currency isn't going to appreciate by more than 5% in any given year any way. Therefore, you are better off investing in some kind of money market fund or CD in the US, since interest rates are rising here. The other thing that your parents can do, which is more advisable, is to invest in an index fund for the Asian markets. The Asian markets in general did quite well last year, and it should continue to do well as expectation of yuan revaluation pulls up the regional markets.

Another reason to expect rising markets in Asia in the coming year is that the Chinese central bank (PBOC) revealed recently that the main currencies in the basket are USD, EURO, JPY, and KWON, two of which are Asian currencies. We don't know how much yen or won the PBOC holds, but given that the forex reserve was mostly based in dollars, there is reason to think that they will need to bulk up in the other two currencies. The main point is that if many market players think the same as I do, and it seems to be the case, they will stock up in Asian stock, which will fulfill the expectation of rising Asian markets.

Some caveats 1. I wish I had the money to test my theory, but I don't, so I have no stakes
2. the PBOC is unpredictable and might actually sell their stock of won and yen to defend the dollar. Afterall, the capital of two of their largest banks, BOC and CCB, is based in dollar. There is a hedge arrangegment between BOC, CCB and Huijin, but things will get very messy if the USD really tanks against the other currencies.

did not you have any comments on the news release by Chinese government regarding Chen Liangyu's arrest? It must be interesting...
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