It's not a floating currency, it's directly controlled by politicians. Holding yaun is taking a speculative currency bet on the competency of the Chinese Communist Party to successfully manage the Chinese economy.
Yeah, and given the results of the past decade I'm inclined to trust the Communists... Not that they're actually communists; they're just a really big national corporation, imho.
China, not the Fed, has ultimate control over their monetary policy. They can always change their monetary policy and probably will have to. Which is what the discussion is in fact about, if you read the original article.
If the Chinese keep up their peg, holding RMB is equivalent to holding dollars.
If they fail to maintain the peg, the RMB will most likely rise. Most US consumers are already exposed to the downside of this risk - they have expenses which will rise if the RMB goes up (e.g., all the goods they purchase which are made in China).
Why would you need to visit China to have an opinion that could be arrived at by looking at financials - a common practice in measuring success. Just look at a portfolio of large Chinese companies - they are doing well, thus I would also hypothesize that they are well-run companies.
Chinese firms are riding a huge wave of growth driven by wage differentials. In this macro context, it's easy to make a lot of money with poor management.
Trust them to do everything they can to keep it growing. People are in China are only generally content with their government because every year everyone gets richer and richer, except the family five blocks down the road that had their house confiscated and compensated only 25% market price because the local council is planning to build a `public facility` on the land.
I expect them to keep activity very high, but I don't expect them to allocate capital well in a way that will result in much profit and sustainable growth. This could last for a while, but IMO it's very unstable and could blow up faster than many expect.
Part of my reasons for believing this are stated in this presentation (which has been posted on HN, iirc):
Horrendous action, no doubt. But there was an interesting follow-up:
"Prior to Kelo only eight states specifically prohibited the use of eminent domain for economic development except to eliminate blight: Arkansas, Florida, Illinois, Kentucky, Maine, Montana, South Carolina and Washington.[30] By July 2007, 42 states had enacted some type of reform legislation in response to the Kelo decision. Of those 42 states, 21 enacted laws that severely inhibited the takings allowed by the Kelo decision, while the rest enacted laws that place some limits on the power of municipalities to invoke eminent domain for economic development. The remaining eight states have not passed laws to limit the power of eminent domain for economic development." (from the same link)
Proverbs 13:8 "A person’s riches may ransom their life, but the poor cannot respond to threatening rebukes."
I was thinking about it in relation to the US legal system, but it applies to politics as well. If some local politician tries to screw you over, the appropriate response is to throw money at the court of local opinion and whoever will run against them and destroy them at the next election.
After all, if they abuse politics as a means of enriching themselves, they are unworthy to hold office.
Kick up a stink, force a by-election, start taking out ads against them in the papers etc.
Accuse them of corrupting the youth of Athens (worked for Socrates opponents).
Not without also trashing it for those in China using it as a store of value, and not without the cost of price instability being imposed upon anyone selling/buying goods with the currency during the process.
You can if every thing they want to buy is made in your country.
The US can't half the value of the dollar to boost exports because everything in Walmart that is made in China will double in price.
China can because everything it's people want to buy in GreatWall-Mart is already made in china. As long as the government steps in to subsidize imported fuel the people wouldn't notice as long as they didn't travel - and you don't want them to travel anyway.
But I suspect less so in china than the US. I doubt that a major part of the Chinese diet is exotic fruit flown half way around the world out of season.
China does have oil reserves and could always 'spread democracy' to some 3rd world country if it needed more.
Much like the tech bubble and housing bubble, by the time you read these articles in the mainstream press, it is FAR too late to invest. You've already missed 10-15 years of explosive growth in the Chinese economy.
Perhaps in stocks, but the value of the currency is kept fixed by the Chinese government and wasn't available for purchase until very recently. Even if all of America's hedge funds spent all of their money on Yuan, it wouldn't get any more expensive unless the Chinese government intervened.
If you got into China 15 years ago, you had no idea how things were going to pan out (and you deserve compensation for holding that risk). If you get in now, there's a more likely chance (I'd argue) that you'll do well, so the risk, and therefore the compensation you deserve, is lower. And holding currency is a lot less risky than equities, anyway.
The people that would be interested in a Yuan bank account up to $20000 aren't really sophisticated investors anyway.
Simply not true. Laughably so. Listen to yourself. You're telling people not to invest because they'll only do well out of it rather than doing very well out of it. People were saying the same thing about gold two years ago and one year ago.
The problem with that sort of thinking is that it relies on you being able to time when when market will go from being irrational in one direction to being irrational in another.
Lets take the dot-com boom as an example. There were people saying that dot-com companies were overvalued in 1997, when the Asian currency crisis hit. Those people were, in retrospect, probably right. However, the next two years made them look like complete fools, as the bubble maintained exponential growth for another two years before completely collapsing.
Same thing with China. Yeah, the bubble might have another couple of years left. If you get in now and get out when the crash hits you'll make a modest profit. But, if you mistime the crash, you could stand to take huge losses, as the value of your currency investments falls far below the price you paid for them.
The original argument was that there was no point in investing, because if you'd invested 10-15 years ago, you'd have made a lot of money. That argument is wrong for obvious reasons, which I will spell out anyway; just because something did well in the past is no reason to think you'll lose money on it in the future.
Your argument is that if you invest in something and it goes down in value, you lose money. That's true but not relevant.
Eli's point seems to be that it's possible to make money on an investment after it's had an explosive growth stage; the obvious truth in counter to the initial falsehood, and in no way addressed by your comment.
I think that the point is that after the explosive growth stage, if something is a bubble you end up in a (possibly) short period before the bust. While you can make money investing during the period, the risk is that much greater that you will miscalculate when the bust will happen and take heavy losses. So:
1. Explosive growth is over, you can't make money anymore.
2. That's not true, you *can* still make money.
3. But attempting to make money at this stage is riskier.
Good advice, I think. Last year I put a year's worth of salary in a good emerging market fund and felt better having diversified. I think for us small investors, diversification for some tiny shred of possible safety is more important right now than maximizing yields. No investment is really safe though - best bet is in producing income in diversified ways.
The least stupid course of action is dollar cost averaging against a global market index but since we're talking about fairly stupid bets such as throwing 4k into the Yuan, then here you go.
My bucket:
FXI is a China fund
EEM is an emerging mkts fund
EWS is singapore
or you could just assume that the Chinese will want meat so you buy MOO
>Politically, the country is under international pressure to rein in its huge trade surplus.
The government doesn't feel any of this pressure, as it's not an internal issue they don't care.
I would argue that yes the yuan is likely to rise against the dollar, but because of high inflation (very very high in China) most assets would also rise in comparison to the dollar(Oil, Gold, Silver etc.)
Actually the only good reason to invest in the yuan I would think is diversification. It's not a good idea to keep your investments as cash during a time of high inflation.
In January 2006 Gold was $525, January 2010 it was $1125
Silver, January 2006 $9, 2010 $17, most assets are climbing fast in relation to cash, much faster than 25% over 5 years.
Is there much inflation in the US right now? It's really high in the mainland at the moment, particularly with relation to food.
My business partner just sold an apartment in Beijing. I tried to convince her to buy up some land back in the US, but she chose to buy another apartment here instead. Part of her concern was that the US housing market was going to be relatively flat for the next couple of years, which is her desired time range for selling the new property. The future potential weakening of the dollar vis-a-vis the RMB also played a role.
The only major difference between CPI and Core CPI is that CPI is more volatile than Core CPI. This is why, for the purposes of year on year changes, Core CPI is usually reported. If we didn't do this, we'd get headlines like "OMFG, massive inflation, we are all doomed" followed by "OMFG, massive deflation, we are all doomed" 6 months later. Over a period of a year or two, massive inflation x massive deflation = small but stable inflation.
A better way to go would be to use moving averages, but that's too complicated to explain to reporters.
> A better way to go would be to use moving averages, but that's too complicated to explain to reporters.
Yes, MA is the first thing that came to mind when reading your big paragraph. It would be a real shame if journalistic incompetency truly is the reason we have not adopted it.
Fair enough; a misnomer on my part. However, it's disingenuous to tell the US consumers that the core inflation is 1.2%, when their gas price has doubled (from 2009)
Official inflation rates often aren't a very relevant measure anyway. Better to think about personal inflation rates, depending on one's future expenses and living locations. An unhealthy 50-year-old with high upcoming medical costs has a high "personal" inflation rate, whereas someone surfing every day on a Mexican beach a low one.
This is a friendly reminder that before you throw a ton of money into China, you should probably discuss this with a financial advisor. The WSJ isn't really the best place for advice as they don't know your individual risk tolerance, and listening to advice on a startup-focused forum may not be the best decision either.
OK, that’s the upside from the depositor’s point of view. What is the upside from the Bank of China’s point of view? Given the massive dollar reserves that the Chinese government has accumulated from its trade surplus, why should they sell off renminbi in exchange for even more dollars? If the RMB/USD exchange rate is almost certain to increase, why would the bank want to give up an appreciating asset in exchange for a depreciating one?
From the Chinese goverment point of view this is a small step (everything they do is in small steps) towards converting renminbi in a global reserve currency.
Their deep reason for that is turning Shanghai in the world's leading financial center.
US dollars, devalued as they are, are still the reserve currency of the world and most importantly, oil is still denominated in USD.
So basically they can print up as many yuan as they can sell, and exchange paper with pretty pictures on it, for oil and other commodities they can actually use.
Ah yes, the holy trail of investments. This one, we swear, won't go down! Really, look at all the reasons. Just like housing. It's not like their banks have billions of yuan in loans to companies or government investment vehicles which large numbers of economists question the viability if.
Your arguments appears to directly contradict your skeptical position. If there are a lot of bad loans on the books of Chinese banks, then the inevitable write offs of these loans will cause massive asset deflation, same as it did in the US in 2008. The result will be currency appreciation, or at least the pressure to appreciate, given the currency peg presently in effect, and holding such currency is appears to be a great idea.
It seems that if the goal is to diversify, there are plenty of other options. That isn't to say that this one is bad, but I'm deeply skeptical of any investment once the press starts running articles about why you should buy into it.
Yeah; "diversify for safety by buying this one particular thing we're doing our best to make wildly popular" strikes me as disingenuous advice. "Diversify by holding a portfolio of small, mid, and large-cap domestic and overseas equities, ETFs, bonds, real estate, and other assets in proportion to your risk tolerance and investment horizon" seems to hold up better with a year's hindsight.
Good rundown in article. We were discussing this last night in the freenode #startups IRC channel ;)
The rumor is that the $20K per year investment cap is limited only to individuals and not institutional investors and funds. Furthermore, if there is massive demand, it is expected that those caps will be raised.
What is unclear is how your yuan can be used to make investments in China itself?
Why would the Chinese lift the cap for institutional investors? They would be the ones that would try to use the Yuan at some point. With a 20K cap, it's more like a novelty than a real investment.
It seems unlikely the Chinese have a need for many dollars flowing to them. I mean, look how many they have - unless something truly weird is going on...
Why would China do that? They already have plenty of foreign reserves ($2.85 trillion and growing - enough to buy Spain's GDP two times over), and they seem to be struggling with inflation. I guess the Chinese government is not as sure as the WSJ that the renminbi will appreciate.
I am not an economist, but to me arguments 1,2 and therefore 5 seem specious. 3 and 4 hold water, but they are pretty self explanatory.
China's economy, to me, seems like a leverage play on the US. If the US economy seriously stagnates, China's economy will follow suit, and likely in a much more dramatic fashion. The opposite is also true, when the US consumers get to spending China (at least for now) stands to benefit tremendously.
For me, the best option if you are looking at foreign currencies, is to go buy a brazilian government bond and get 10% on your money in 3-5 years.
Looks to me like China is exporting their currency, to export their inflation, and stem the rising consumer costs in China. And I'm sure they have dreams of being the next reserve currency of the world.
To my untrained eyes, it makes the idea of diversifying into anything other than the US dollar seem like a good idea. But to be honest my understanding of the US monetary system gets fuzzier the more I learn about it.
Not claiming to be more intelligent, but my take on your question is:
Just as price is a function of supply and demand, so are exchange rates. The money supply is independent of the price of goods and of the price of currencies (exchange rates).
Seemingly, a larger overall quantity of dollars in existence would seem to predict a decline in the value of the dollar relative to other currencies, but the monetary policy decisions that resulted in increased money supply are intended to achieve relative price stability.
For example, the dollars introduced to the economy and lent to banks had the effect of encouraging banks to make loans, which helped increase demand for products and services, which helped prevent prices from falling.
Also, many of the dollars are being used as reserve capital after the market price of various securities which had been used as reserve capital declined, leaving the entities under-capitalized. All this was done in an attempt to keep interest rates low (in effect a price target) and prevent banks from being forced to stop lending money...
So I think the bottom line is that the behavior of consumers and firms can account for so much variability in supply and demand that the money supply can expand greatly and prices can still say roughly constant... the other side of the coin being that monetary policy was used to keep prices relatively stable, in this case by keeping the credit infrastructure status quo alive.
edit: Of course, if the Fed gets it wrong or lacks the will to raise interest rates when necessary, hyperinflation can result, which would impact exchange rates.
Investing in rubles ops.. yuans is very interesting proposition. Especially when inflation rate is skyrocketing and there is housing bubble of enourmous proportion.
And China's economy is very much connected to US economy: if dollar collapses and yuans unpeggs, China's economy will suffer.
As always, great advice from WSJ: I will have one million dollar in my account in 5 years - if I start with two millions.
I know this won't be popular, but the whole idea of "diversification" has always struck me as a lame attempt by rich people (Stock brokers) to get more money from poor people. So I roll my eyes whenever a guy with a Rolex and a Porsche is telling me I need to "diversify"
Imagine average Joe investing in a very non-diversified portfolio of one stock which he has decided he likes, perhaps due to personal knowledge of the firm.
Over time, odds are this stock will do poorly compared to if he'd had a more diversified portfolio.
It's the same general law of markets that is why it's generally better to invest in index funds... they benefit from overall increases in productivity and economic growth, without being subjected to all the risks that less diversified portfolios suffer from.
Of course, it's always possible to formulate a 20/20 hindsight critique of diversification b/c there is always an investment or two that retrospectively looks like it would have been an obvious sure thing to a layperson.
Over time, odds are this stock will do poorly compared to if he'd had a more diversified portfolio.
How are you calculating these odds? I'd naively assume that the average performance would be the same but the volatility would be much higher. Dollar cost average into it and you reduce this somewhat. I've never really understood the magic of diversity either, unless it's just to insulate against risk of ruin.
Just look at the top stocks 30 years ago and see which ones are still in business today, and of those which have beaten the market average. No stock will outperform the market over the long term. Nor will any mutual fund!
For medium time horizons it's not impossible but exceedingly unlikely.
For short time horizons it's still not remotely easy for firms to accomplish, and many do not.
This is a disappointing answer. Yes, most firms don't manage to beat the market average. The apparent answer would be that about half of them do, probably slightly fewer due to occasional runaway successes.
What you seem to be saying is that there is a complex system guaranteed to beat the expected return of buying and holding a single stock. I don't see how this can be true, although it's certainly possible that the lower volatility is preferable enough to offset the slightly greater costs.
Do you really believe that it is 'exceedingly unlikely' that a firm would exceed the market average for a 15 year period? I haven't done research into this, so I'm happy to learn. Instinctively, it would be a pretty frequent occurrence.
Are you saying that more than 95%[1] of the individual underlying stocks held by a major index fund will underperform the market over a 15 year period? If yes, how can this be? If not, what are you saying? Are you a betting man?
Surely some firms will do better than average, it's just that humans are notoriously bad at anticipating which firms those will be, hence the superior performance of index funds compared to managed mutual funds over the long term.
> I suppose it's possible for a company to exist indefinitely, but how many companies that existed 1000 years ago exist today?
How many markets that existed 1000 years ago exist today? The point I'm making is that markets are composed of individual stocks, they can't be inherently superior in terms of ROE to the stocks that the indices track.
Diversification means I need to give the stock broker more money. That's all it means to me. I understand the risk aversion concept. You don't need to "educate" me.
Telling lay people (as you call them) that they need to do this or bad things will happen is the perfect scam. Create disonance and then offer a solution.
"Repent and ye shall be saved." "Diversify and ye shall be saved." I don't buy either argument. I got out of the market in 2000, never been back. Never will.
Edit... and yes, I owned index funds, but they wanted me to buy more index funds to further diversify my holdings. I learn quickly. That's always been my problem.
How does buying an index fund mean giving a stock broker more money? It's your money, invested. You're certainly free to keep it under your mattress if you prefer. Historically, money invested has drastically outperformed money kept under mattresses :)
1. You don't invest? Let me help you start. (give guy money)
2. Good, you invest. Let me help you diversify. (give guy more money)
3. Good, you are diversified, but you need to diversify more (give guy even more money)
4. You have too many stocks. Let's get you into more bonds. (give guy money)
5. Hmm... you don't have any exposure to Far East currency, but we can't take away from your Euro position. Give me some more money so we can buy this new Chinese currency. (give guy money)
Um, why you buy an index fund and you put $1000 in, you can immediately get $1000 out. And many brokerage accounts are free.
So this is no more of a scam than a bank account, except you take on more risk in return for more reward. Not a huge risk, but bigger than the money market.
It's true that relative to inflation many investments do quite poorly, and it's true that some investing is a scam. I don't think it's true that all investing is a scam.
I know this won't be popular, but the idea of "backups" has always struck me as a lame attempt by rich people (Retailers) to get more money from poor people. So I roll my eyes whenever a guy who sells hard drives and RAIDs is telling me I need to "backup."
It's because of covariance of returns. You can construct a portfolio with the same expected return as a single stock, but with much lower expected risk, defined as variance of return. Or a portfolio with higher returns for the same risk. And so on.
Anticipating your next question, yes, in general, historical risk has a high R2 with actual risk, where risk is defined as being normalised to an index.
Pro-tip: If you're in China, and a Bank of America customer, you can withrdraw money fee-free at the China Construction Bank. Cash may be less convenient than a Bank of China account, but, just saying.
In a rather-unrelated matter, does anyone have a Swiss bank account? I'm looking for a bank to open one in but apparently most have a 500k minimum, I just want a personal account...
Buy gold instead, for the same reasons: (1) it's very unlikely to go down; (2) it's very likely to go up; (3) you won't miss out on a lot of interest elsewhere; (4) it diversifies your portfolio; and (5) it's a hedge against the decline of the U.S. economy.
I don't understand this...are they giving you a better interest rate? Aren't they simply operating as a US bank (if they are FDIC insured). You really aren't investing in the Yuan...
Thanks for the link. Didn't realise that they are allowing you to buy the Yuan and the account is actually in Yuan (though you deposit in USD -- conversion at the time of deposit).
The Yuan is pegged to the US Dollar at around 1 yuan = 0.15 USD cents. A graph of exchange rate for Yuan/USD over time produces a horizontal line.
The current president 'Hu Jintau' controls the exchange rate through China's currency policy which dictates how many USD an owner of Yuan can get in exchange.
So buying yuan is a bet that the peg will be removed and the USD will be printed so much that nobody will exchange human labor for it.
It could work, but I'd buy physical gold before the yuan.
That's not true. The Chinese government may want to unpeg their currency (1) to give their citizens more purchasing power, (2) because of trade pressures levied by the United States backed up by the threat of tariffs, or (3) because China doesn't want to export to the United States as much. Betting the yuan will rise relative to the dollar is not even remotely close to betting that the dollar will become worthless.
