Time to Invest in China and Trade the Yuan?

Now that the International Monetary Fund (IMF) has awarded the Chinese yuan with its world reserve currency badge, you can bet that a ton of investors are looking to put money on the Chinese economy and trade the yuan. However, Chinese assets aren’t as easily accessible as our good ol’ forex majors.

In fact, not a lot of forex brokers offer the CNH, which is an offshore version of the yuan created by the Hong Kong Monetary Authority and the People’s Bank of China, in their usual list of trading pairs. Among the ones I’ve seen are Oanda, FXCM, Saxo Bank, and FxPro. Other traders opt to trade yuan through futures contracts, which are offered by more brokers, although liquidity might be relatively low.

chinaThen again, the inclusion of the yuan in the IMF’s Special Drawing Rights (SDR) or basket of reserve currencies by September next year could draw more investor interest for the Chinese currency, increasing its market share and liquidity. In addition, central banks and financial institutions are expected to add yuan holdings in their vaults, which would pave the way for more yuan trading across the globe.

In addition, the latest SWIFT report revealed that the Chinese yuan made its way to the top five spot in terms of the most widely used payment currencies in the world. The report’s yuan tracker indicated that it is the second most active currency for payments between China and Japan, overtaking the Hong Kong dollar and the U.S. dollar.

But before you go all-in with bullish yuan positions, keep in mind that the Chinese government and central bank have been notorious for lowering the value of their currency to give their exporters an advantage in trade. After all, a depreciating local currency makes Chinese products more affordable in the international market, thereby increasing demand. While monetary authorities have shown that they can play fair and make the proper adjustments in their yuan trading levels, the fact remains that the Chinese currency can still be controlled by the government.

Spreads can be unusually wide for now, with FXCM offering a target spread of 26-27 pips for USD/CNH trading. Also, not a lot of currency pairs are offered, although it’s not hard to imagine that forex brokers might be open to the idea of adding EUR/CNH, AUD/CNH, or GBP/CNH someday. By the looks of it, the Chinese yuan outranks the Japanese yen and British pound in terms of SDR weights, which might be interpreted to mean that the IMF deems it more stable.

Lastly, the Chinese economy isn’t on such a strong footing just yet, so there may be a lot of room for the yuan to fall even with the surge in investor interest. Recall that its stock market had its share of ups and downs this year and that its central bank has scrambled to make monetary policy changes to keep the economy afloat. But come to think of it, these risks and uncertainties are part of what makes spot forex trading exciting so the Chinese yuan should have an easy time blending in!