What You Can Do About The Chinese Trade Deficit

Yuan Renminbi
This has nothing to do with real estate but I thought it was interesting.

The Chinese trade deficit is sort of like the weather - everybody talks about it but nobody does anything about it (actually attributed to Charles Dudley Warner and not Mark Twain). But what can you really do about the trade deficit other than to stop spending your money on just about everything? It turns out you can do plenty and it might even turn out to be a good investment for you. Let me explain.

One of the reasons that the trade deficit with China is so high is that the Chinese government controls the exchange rate of their currency with the dollar. Normally, when we buy too much stuff from one country we drive up the value of their currency, which makes their products more expensive and that acts as a regulator on our buying behavior. However, in the case of the Yuan (also known as the Renminbi and I'm not sure how to pronounce either one of these and who else has two names for their currency but I digress) the Chinese government controls their exchange rate by constantly buying dollars and selling Yuan to keep the value of the Yuan constant. By some estimates the Yuan is undervalued by 25 - 30% because of these activities and that's why the Chinese are sitting on so many dollars.

However, in the long run, no government is stronger than the financial markets (that's why these government attempts to support the housing market are really dumb - ahhh...a real estate connection). Historically, when governments try to manipulate the currency markets they usually lose in the end. In addition, the Chinese are under constant pressure by the US to raise the value of the Yuan. In fact, about a week ago they agreed to let the Yuan appreciate slightly. Most experts expect them to let it rise about 5% in the next 12 months - which is not much but it's a start.

So, if everyone who feels like the Chinese are competing unfairly ran out and bought Yuan with their dollars, they would drive up the value of the Yuan. Of course, the Chinese government would attempt to buy up the dollars that were sold to buy these Yuan but eventually the Chinese would be sitting on so many dollars it would be ridiculous. In fact, the more dollars they sit on the bigger hit they will take when the dollar ultimately falls in value (and it will).

But how does the average person buy Yuan? It turns out that there are at least 3 relatively easy ways to do this:

  • You can invest in an Everbank WorldCurrency Access Deposit Account denominated in Yuan. These accounts are even FDIC insured - but only against bank insolvency, not changes in exchange rates.
  • You can buy the Market Vectors Chinese Renminbi/USD exchange traded notes (CNY). 
  • You can buy the WisdomTree Dreyfus Chinese yuan (CYB) exchange trade fund.

The last two are actually investments traded on the stock exchange but you should know that they track the value of the Yuan by investing in futures contracts and there are subtleties you should understand about these vehicles that are too involved to get into here (see contango).

With any of these investments you basically gain as the Yuan appreciates and your entering into these investments actually puts upward pressure on the value of the Yuan. If the Yuan appreciates by 5% over the next year you will make approximately 5% (except for that contango thing I mentioned). So, not only can you do your part to fix that trade deficit you keep complaining about but you can even make some money in the process.

Disclaimer: This is not intended as investment advice.

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    Gary Lucido

    After 20 years in the corporate world and running an Internet company, Gary started Lucid Realty with his partner, Sari. The company provides full service, while discounting commissions for sellers and giving buyers rebates.

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