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Should I Simply Buy Chinese Money Market Fund (Instead of Stock Picking)?

Contributed by mm | December 10, 2007 1:41 AM PST

6325renminbi.jpgThere are enough headlines that U.S. dollar has weakened against almost all major currencies in the last few years, and it is certainly not good news for everyone making a living in the States -- higher price for imported products, more expensive overseas vacation, etc. As a U.S. taxpayer who lives in China, however, I am facing a different flavor of the challenge:

On one side, since most of my compensation package is now mostly denominated in Chinese Yuan, without doing anything, my salary expressed in U.S. dollar will receive automatic increase. This certainly serves me well when I reported my monthly net worth in dollar terms.

On the other hand, since most of my portfolio is sitting in U.S. accounts, and most of my spending is in China and more likely than not we will spend a good part of our golden years in this side of the Pacific, we do worry about our future purchase power in the local currency.

A quick dose of history: for a longer period before July 2005, the Chinese government mandates a Chinese Yuan's peg to the US Dollar at a rate of 1 dollar = 8.27 yuan. The peg was lifted in July 2005 with an immediate adjustment to 1:8.11, and while the government still dictates the exchange rate, it has been gradually inflating the Yuan. In the twelve months in 2006, Chinese Yuan gained 3.5% against the dollar. So far in 2007, Yuan gained another 5.5%. Given the mounting pressure from U.S. and Europe complaining China is selling its products too cheap (have you complained that Walmart is selling things too cheap before?), it is rumored but widely believed that Yuan will gain another 7-8% in 2008.

So how should I respond to the challenge?

One thing I am already doing is to increase the exposure of international equity in my portfolio. While most personal finance literatures suggest 20-25% foreign equity exposure in aggressive portfolios, my portfolio already has 35% of its value invested in mutual funds specialized in foreign stock markets.

But there might be a simpler option: move my money to China and buy local money market fund. After five interest rate hikes so far this year, currently money market funds are yielding about 3%. Adding the 7-8% expected currency gain in 2008, we are talking about 10% gain in dollar terms with almost zero risk, which is seemingly more attractive than U.S. equity investment opportunities on a risk-adjusted basis. Better, one does not have to pay tax on either the mutual fund dividends nor the currency gains (China does not assess capita gain tax from individuals).

It appears to me that as a first step, a rational choice will be to at least move majority of my cash balance to Chinese money market funds, and expect an almost risk-free return of 10% or more in dollar.

No wonder the "hot money" in China is piling up every day!

What do you think of this idea?

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This Post Has Received 7 Comments. Share Your Opinions Too.

GS Commented on December 10, 2007

If you haven't, you should listen to what Jim Rogers has to say about the topic. I believe he would tell you to get going on it, and possibly don't just stop with your cash. Several of his interviews are posted on YouTube.

To summarize, he feels strongly that one should get out of US dollars, buy renminbi, commodities, etc. He is less enthusiastic about other emerging markets, but loves China's prospects long-term. Also thinks Chinese equities are solid long-term, although near-term they may be riskier due to the possibility of a bubble forming.

GS Commented on December 10, 2007

What are the best options for those of us in the U.S. who want to put some money in Chinese currency? Is there a convenient & inexpensive way to do this and make some interest? I think I would be happy to get the 3% yield you mention, but don't know if that's available to U.S. citizens living in the U.S.

moom Commented on December 10, 2007

As you are living in China you have most of your portfolio invested in foreign stocks - in the US and elsewhere :) One question is what is the safety of Chinese money market funds?

2million Commented on December 10, 2007

I have been thinking about this as well. However, given the limited ability to move from RMB to USD I have only thought about moving money to pay future expenses in China.

J.C.'s Money Commented on December 10, 2007

I wonder about the validity of the rumors that the Yuan will gain so much against the Dollar. China obviously wants to keep its competitive edge in exporting goods, so having a weak currency is an advantage. Since the exchange rate is artificially set by the government, I doubt they will be so hasty in correcting it.

Its probably a good idea, and I think I would do it in your position, but I wouldn't consider it risk free.

Soulek1 Commented on December 10, 2007

I would feel a lot safer with my money in chinese cash equivalent investments than I would with $200,000+ in US Financial stock shares.

I expect bear market in US stocks over coming 3 years so this strategy of the China money market could be a great ABSOLUTE RETURN strategy. Preservation of capital comes first especially with the credit market problems out there currently.

Creative Investor Commented on December 12, 2007

Soulek1: 3 year bear market? Really? We'll be on the way to a new a bubble of some sort by 2009.

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