Monday, April 12, 2010

Should I Invest or Buy Renminbi - RMB?

As you have probably known that China is one of fastest growing economic country in the world.  If not, why I want to say Chinese is the 21st century languge? So, now back to the question should you invest in Renminbi (RMB) or Chinese Yuan (CNY)?

Before we answer that, let's look at Chinese Yuan (CNY) or Renminbi (RMB) currency trend for the past 15 years. I plotted the Malaysia Ringgit (MYR) to RMB and you can plot it by yourself for your own currency. The trend should be around the same regardless of what currency you're comparing to.


What you can see here from the graph is the RMB has been staying flat since 1998 until today. Now we raise another question of whether the RMB will continue to be in flat? You may also wonder why the RMB currency is flat but on the other hand China is the fastest growing economic country?


Why RMB Currency is Flat?

It is probably due to the battle between China and U.S. both economically and politically. In fact the China government wants it to be this way so that they can keep exporting their stuff at the cheapest price to U.S. as compared to other countries (because other country's currency is appreciating). This leaves no choice for U.S. to buy or import stuff from China and not from other countries.


Imagine if China let RMB currency to be appreciated and U.S. used to buy a pen for US$ 1, now they have to buy a pen for US$ 1.50 from China. U.S. may switch to buy from other countries and China will lost their income (i.e. less in exportation). China doesn't want this to happen. So, what China does is to play around or manipulate their own currency by making sure it doesn't appreciate. Now we raise another question, is RMB currency under-valued?


Is RMB currency really undervalued?

If you ask China, China will tell you that RMB/CNY is NOT undervalued. Perhaps they don't want to let you know that they're manipulating the currency? The funny things is other than China, everyone seems to think RMB/CNY currency is undervalued. One of the obvious reasons is that RMB currency does not really appreciate in-line with China's economic growth.


So now U.S. is pushing China to revalue the RMB. Do you think China will revalue the RMB? If yes, do you think RMB currency will appreciate? For me, YES!!! If no, RMB will probably stay flat but will it appreciate in future? For me, YES!!!


Conclusion

In reality to answer all these question, there are no absolute answer and what I have explained so far is in the most simplest form. It is in fact a lot more complex than what I have explained. I'm also learning in progress. :) So all the questions that you have, eventually it is still back to you to make your own call. For example, should I invest in RMB currency? It is totally up to you.

Here are my answers:
Q: Should I Invest in RMB or CNY?
A: Yes, you should because RMB or CNY currency is currently undervalued.

Q: Why RMB or CNY is undervalued?
A: Because everyone "perceives" RMB or CNY is undervalued.

Q: Why everyone "perceives" RMB or CNY is undervalued?
A: Because RMB or CNY doesn't in-line with China's economic growth.

Hope these pretty common-sensed answers satisfy you especially you're a long-term investor like me. Don't wait anymore, go ahead to invest in RMB before it appreciates! Good luck!

p/s: I don't buy RMB directly but I invest in RMB by opening a foreign fixed deposit (FD) account though local bank. I find it is the easiest way to invest in Forex especially for long term investor like me.

11 Comments:

Michael Tsen said...

RMB undervalue is what the west claims to be, China internally believe its not. On this aspect, I support China's policy to control their currency not to over expand like its economy now. This is one way to protect their own wealth not to be speculated away through forex - something the west is good at.

The east will take over the west by 2020 so the growth of China is indisputable. But since RMB is controlled, unless you know the China government people, then investing in RMB is just betting on when they will relieve the ban.

on the other hand, investing on a china based money management fund will ride on the same benefits with bigger flexibility

ChampDog said...

I agree with that too that China did the right thing and it is really up to China whether they want to appreciate their currency.

I'm not even sure appreciation of RMB will be good to US because it will cause inflation in US. They need to pay more for the goods from China.

I think if you have a lot of cash and you put that in fixed deposit in RM, you may want to consider to put some of the money in RMB or the other foreign currency which you think will grow in future.

1-million-dollar-blog.com said...

For me, I think Australian Dollar is better. Higher interest rate and their economy also quite good.

ChampDog said...

Really? Thanks for sharing this. I don't know much about Australia Dollar and I will going to more research on that. I just know that their interest rate is not bad.


If anyone has more comments on Australia Dollars, please free to. :) I would like to know more details on why Australia $ currency is strong. :)

1-million-dollar-blog.com said...

Australia is blessed with many natural resources such as iron ore, coal & uranium. When commodity price increase, AUD also tend to rise in value and vise versa. When commodity price crash in 2008, AUD drop like crazy as well but recover very fast. I manage to buy AUD at almost the lowest point.

AUD to RM exchange rate in early 2000 is about 2.0 & it raise to 3.1 at the peak during commodity boom.

During economy crisis, it drop to about 2.5 but it recover close 3.0 as of now.

ChampDog said...

It looks like the AUD is backed by commodity then? Thanks for sharing this information. I did a pretty quick look at the pass performance of AUD, it is really not that bad. :)

I think we still need to keep in mind the valuation of currency is pretty complex as there are too many factors.

What about New Zealand dollar then? Any comments?

1-million-dollar-blog.com said...

Yes, AUD is backed by commodity.

I am not that familiar with NZD but previously it used to follow AUD (because of same region I guess)

If I to choose between these 2, I will go for AUD.

If I call recall, Reserve Bank of Australia is the first bank raise their interest rate after the recent recession. This shows their economy is strong.

red said...

I am worried that Yuan will fall into deep valley because the overheated.

ChampDog said...

Yupe, there always have risks. :) I hope it won't drop so badly!

Anonymous said...

My money is middle east or africa. The US wants the chineese gov't to raise their currency yes. But why? Because they will set up trade in their new industrial advances. China will benefit as well because of this. Once the US can demonstrate that they have created a suitable market for China elseware, of course.

ChampDog said...

Not that the RMB goes up but USD drops very badly these days...


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