The Chinese Yuan is growing in importance as a global currency, and this trend has been especially apparent since the 2008 financial crisis. Several countries including Japan, Australia, and Brazil have set up bilateral trade agreements that stipulate that more trade between China and these countries will take place in their local currencies (the Yen, the Australian Dollar, and the Real), as well as in the Chinese Yuan. A consequence of this is that the U. S. Dollar will be used less frequently.
In the past couple of days, we have seen a couple of announcements from two African countries — Nigeria and Zimbabwe — which indicate that this trend is set to continue.
On January 28, Nigeria’s central bank announced that it intends to increase its Yuan holdings from 2 percent of total foreign exchange reserves to 7 percent. It will sell U. S. Dollar holdings in order to accomplish this. This means that Nigeria will sell roughly $2.15 billion worth of Dollars in order to buy Yuan.
The next day, Zimbabwe’s central bank announced that it is going to make the Chinese Yuan — among other Asian currencies — as one of the official currencies that is used in Zimbabwe. Recall that the Zimbabwe Dollar collapsed during the financial crisis, and as a result, Zimbabwe’s economy has been functioning without an official currency since February, 2009. Instead, it has been using other currencies including the U. S. Dollar, the South African Rand, and the Botswana Pula. But given the increase in trade between Zimbabwe and Asian countries — most notably, China — the central bank has decided to acknowledge this by making the Yuan, the Yen, and the Australian Dollar “official” currencies.
From a supply-demand perspective, this doesn’t materially alter the fundamentals of the Yuan or of the U. S. Dollar. Nigeria has just $43 billion in foreign exchange reserves, and so the proposed increase in Yuan holdings from 2 percent to 7 percent is just $2.15 billion. Furthermore, Zimbabwe’s economy is miniscule. It has an annual GDP of just $10 billion, which is far smaller than the daily GDP of the United States.
Nevertheless, these are significant announcements. They are part of a larger pattern — namely, the gradual global shift away from the U. S. Dollar and towards the Chinese Yuan. Dollar hegemony is waning as the Yuan’s usage is growing throughout the world as more nations want to do business with China without using Dollars. This is happening very slowly, but it is happening.
Consequently, investors should consider investments that will benefit from this trend. The most obvious trade would be to buy the Chinese Yuan. While this is a good idea it is not that easy. Investors have access to ETFs such as the WisdomTree Dryfus Yuan Fund (NYSE:CYB), but this fund is fairly illiquid, and it hasn’t tracked the exchange value of the Yuan very accurately. The best way to buy the Yuan is to open a Chinese bank account through the New York Branch of the Bank of China. There you can open up a savings account or buy Yuan-denominated CDs that yield significantly more than U. S. Dollar-denominated CDs.
Investors can also buy Chinese stocks. However, there are other risks associated with Chinese stocks that may not give investors the kind of exposure they are looking for. Therefore, investors who want Yuan exposure through Chinese stocks should look carefully for lower risk companies that have very little debt and a lot of cash.