Thursday, September 6, 2007

How to Invest in Chinese Currency RMB in Singapore?

The rise of China has led to many people wanted to invest in the Chinese currency RMB as they think that with the economic growth of China, the RMB will continue to rise, especially RMB is currently undervalue against other currencies.

The problem with investing in the RMB is that there is no foreign currency deposit in RMB for investors to deposit in. So how does one play the RMB currency in Singapore? This question was posted to me a few times.

As the RMB is not a free currency that has offshore market, it is virtually not possible to buy RMB outside China.

One way to play it is to invest in the Chinese stock market. This is not a direct play, however, as the value of the Chinese stocks are influenced by other factors which may not be the same as those factors that affects the currency. Nevertheless, if the general growth for the country continues, the equity market should continue to perform well, so will the currency. A word of caution, as the Chinese equity market has run up much more than the currency, if there is a correction in the Chinese market, the lost on the equity investment may be more than the currency depreciation.

The other way is to open a RMB account with a bank in Hong Kong, as Hong Kong is allowed to take in RMB deposit. However, this route is impractical for many people. Furthermore, it is unclear if non Hong Kong resident can open a RMB deposit account.

The last method, which to me is the purest play on the RMB, is going through the futures market. The Chicago Mercantile Exchange (CME) has a USD/RMB futures contract. Therefore if one is bullish on the RMB, one should short the USD/RMB futures contract. This is not for the faint hearted. Furthermore, futures contract has expiry date whereby one needs to rollover the contract if he still wants to continue to have the exposure, unlike fixed deposit whereby the bank can rollover automatically for you. However, the futures contract does provide a cheap and efficient way of having an exposure in foreign currencies, much more efficient than the fixed deposit market.

I am currently an Investment Manager with a private equity firm, and a holder of the Chartered Financial Analyst (CFA) qualification.