Potential of Chinese Yuan

Chinese Yuan (CNY) had been in the news recently. Since 1 June, Chinese Yuan and Japanese Yen can be directly traded in both Tokyo and Shanghai financial markets. There is no need for an intermediate currency such as the US dollar for trading between Yuan and Yen.

This is one step to internationalise Chinese Yuan. It will take many years before Chinese Yuan can reach the status of international reserve currency like the US dollar. But long range policy of China is to realise this ambition.

I cannot see that China will go back to a closed economy or state-controlled economy. China had become the world’s second largest economy overtaking Japan in 2010. The China government will not jeopardise this position because economic growth is the best way to lift living standards of their huge population.

During past week when there is flight to safety because of Eurozone crisis, CNY strengthened against Singapore dollar. On 29 Apr, SGD/CNY was 5.0928. (One SGD buys 5.0928 CNY). SGD/CNY was 4.9281 last Friday, which was a 3.2% increase for CNY since a month ago.

I am somewhat bullish about Chinese Yuan strengthening over a long term for a few reasons:

1. China is world’s second largest economy having trade with many countries. CNY facilitates trade.
2. China has taken a step to internationalise CNY currency by allowing Yuan-Yen direct trading.
3. There are several offshore Chinese Yuan (CNH) trading centres, namely Hong Kong, Singapore, London, Tokyo. This suggests there is demand for Chinese Yuan, even it is offshore version of Chinese Yuan (ie CNH).
4. Liberalising of capital market is seen in China in recent times. (Source: “Plans to open up China market further, Reuters, 3 June 2012)
5. China had the world’s largest foreign-exchange reserve in their account. (US$ 3.305 trillion in March 2012) This supports Chinese currency valuation.
6. China is a creditor nation holding foreign assets instead of owing to other nations.

If one has the risk appetite to hold offshore Chinese Yuan currency for a long term, it is one asset class to consider in a portfolio of investments. As with any currency investment, caution is recommended as currency does fluctuate and can turn against an investor.

Copyright © 2012, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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