Tags: ashish | advani | china | yuan

The Secret to Successful Chinese Currency Investing

Wednesday, 06 Oct 2010 01:43 PM

By Ashish Advani

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Today, I will tackle the 1.2 billion-person gorilla in the room: China

As an investor and a close follower of China for the past decade, I appreciate the prudence of how China has nurtured its economy into the second-largest in the world.

Before you protest about human-rights violations and communist approaches in China, I will concede that I can’t condone some of the actions there.But as an investor, I admire China’s chutzpah.

I have been visiting China since the early part of this century and have witnessed some of the transformations firsthand.

While some of the success can be attributed to the lack of democracy in China, much of it has been based on the sweat and toil of the Chinese worker. They do work hard (6 to 6.5 days a week, 10-12 hours a day) and do it for very little money. The entire attitude is different there. They are thankful for having a good job, while we in the United States complain about losing ‘bonus’ payments at the end of the year, as if it was our birthright.

I also am disgusted at the recent passing of the bill in Congress labeling China as a currency manipulator. That is about as misdirected a policy as I will ever see.

One thing is for certain: China will never succumb to our threats and revalue its currency by the 25 percent to 35 percent that is being demanded. Such a demand would destroy China’s economy and completely destabilize the country. The one thing that the Communist Party of China fears is public demonstrations and open revolt, which challenges their authority.

So while America looks at its Congress, the Chinese are furtively moving toward real reform that is suited to their needs and a process that they can manage and control.

Here is a loosely held secret that most Americans don’t know.

Recently, the Chinese government has allowed local and foreigners to open local yuan-denominated accounts. But one can only open these accounts in Hong Kong. This is an attempt by Chinese officials to make the yuan more open and free-flowing rather than the U.S.-style revaluation method.

And this will enable Chinese officials to manage and to control the currency flow, enabling them to control the valuation at a pace suitable to them.

And folks, that is likely the best way to play China now. At present, a few banks in the United States offer yuan-based accounts or exchange-traded notes. However, all of them are based on the old nondeliverable, offshore-style of currency holdings. The Hong Kong-based open-currency methodology is more superior and can enhance returns.

The trick isn’t to just hold the currency in a bank account denominated in yuan. China has smartly locked its interest rates to ours, making returns on the currency via interest yields next to nothing. The idea is to use the local currency to wisely invest in undervalued and carefully selected high-growth stocks in local markets. So in a two-step move, you can ensure solid gains and rich returns in your investment portfolios.

The currency gains (small and measured as they may be) will assist you in two ways. It will help you truly diversify your U.S. dollar-denominated portfolio as well as enhance return as the yuan will slowly and steadily appreciate against the U.S. dollar.

While you hold local yuan-denominated accounts, you will choose and wisely invest in Chinese stocks, which will help you participate in local stocks that have great value and maximum potential of gains. If you only use the U.S.-listed Chinese stocks, you will be missing a larger portion of the market that isn’t available to you.

So don’t wait for our esteemed congressional members to help your investment portfolio.

Get active and buy the yuan in local currency and invest wisely in the second-largest economy in the world.

Carefully make your selections. There are many duds in the every market, and the Chinese stocks listed on the Hong Kong stock exchange are no exception.

After all, you don’t want to be shanghaied in Hong Kong.

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