Profiting from the renminbi revaluation?

June 30, 2005 11:32 AM

How would I, as an individual investor, take advantage of the revaluation of the Chinese Renminbi?

This is basically a mechanical question - how, technically, would I do it? For the purposes of this discussion we can assume that 1) the renminbi is currently fixed against the dollar, 2) current Chinese policy is to maintain this peg, and 3) market realities will force a revaluation at some point in the future. I'm aware that #3 is subject to a lot of assumptions and may not happen anytime soon, if ever, but just assume it for the purposes of this question (an informal discussion here if anyone's interested in the reasons it'll probably happen).

So, what steps would I take to profit from this? The basic idea is that a free market would price the currency at equilibrium and there would be little opportunity for rent taking, but the insistence of government on mucking with that market creates such an opportunity.

Ideally, people familiar with bond, equity, or other trading would suggest opportunities that would work for an ordinary US investor near or somewhat above the median income. But if your solution requires different assumptions (would I need a $50K initial investment? $5M? Access to politicians?), let me know and fire away.

I'm not seriously considering trying to take advantage of this, I'm just curious how, e.g., hedge funds do it when there are such strong forces trying to keep the market out of whack.

posted by rkent to work & money (12 comments total)

An individual investor cannot really, unless they invest in a company that currently operates in China that's US owned, assuming that such a company takes advantage of the fact the Renminbi is currently undervalued (i.e. retaining earnings in the Renminbi instead of converting them into USD).

Being pegged you can't buy the currency on the open market (duh) so the easiest way is out of the question. Your best bet really is to get into a fund that is mainly deals with companies with large Chinese investment, if such a fund exists.

Simply, unless you had a lot of money to invest into companies that are currently keeping profits in China, or move operations your current company to China (risky within itself), there's nothing you can really do to take advantage of this.
posted by geoff. at 11:43 AM on June 30, 2005

geoff's not quite right. Anyone with enough money can approach a bank (or other broker/dealer) and buy options or enter into a currency forward or swap.

I do not think that CNY options are listed on the PHLX, but they do trade over the counter. I doubt that you could make a $50K investment, however, unless you did a lot of other business with the bank.

Peter Zhang has a book that you can read, or you might try to get a free trial from these guys. (article in lower right)
posted by Kwantsar at 12:00 PM on June 30, 2005

Couldn't you go over to China, change $10,000 US into renminbi and bring it back?
posted by loquax at 12:01 PM on June 30, 2005

You could buy long-expiration (LEAP) puts on Wal-Mart or some other security likely to fall if the currency revalues.

For example, you pay $2,350 now to have the right to sell 1,000 shares of Wal-Mart at $45.00 at any time between now and January 2007. If Wal-Mar shares fall to $25.00 between now and then, because of the sky-high U.S. dollar prices charged by their Chinese vendors post revaluation, your position becomes worth $20,000.
posted by MattD at 12:07 PM on June 30, 2005

Couldn't you go over to China, change $10,000 US into renminbi and bring it back?

You could try, but good luck getting it through customs. From what I know, this is illegal with any currency, correct? Or am I deluded?
posted by spicynuts at 12:18 PM on June 30, 2005

spicynuts writes "You could try, but good luck getting it through customs."

$10,000 worth of currency is the upper limit allowed by U.S. customs without a declaration. You can bring back more if you file form 4790. I'm not sure if there's a fee associated with the filing, or a tariff on the additional currency.
posted by mr_roboto at 12:39 PM on June 30, 2005

For example, you pay $2,350 now to have the right to sell 1,000 shares of Wal-Mart at $45.00 at any time between now and January 2007. If Wal-Mar shares fall to $25.00 between now and then, because of the sky-high U.S. dollar prices charged by their Chinese vendors post revaluation, your position becomes worth $20,000.

I must be confused, because it looks to me as if your position right now is worth $42,650 ($45/share * 1,000 shares - $2,350).
posted by kenko at 12:49 PM on June 30, 2005

For an extremely low capacity solution - as in a few hundred or so - you could place bets that it will happen.

Couldn't you go over to China, change $10,000 US into renminbi and bring it back?

If you'd like to save some money on a flight, you can order currency and have it delivered to you (example), but you're going to be limited to around $1500-$2000 per transaction.

Your best bet really is to get into a fund that is mainly deals with companies with large Chinese investment, if such a fund exists.

There's a few ways to do this or something similar, though it won't isolate revaluation exposure and, in some cases, probably suffer from revaluation:

China-centric ETFs: PowerShares Golden Dragon ETF - which is US companies that derive most of their revenue from the PRC. And iShares FTSE/Xinhua 25 - a capped index of the more liquid Chinese stocks on the Hong Kong exchange.

Or the China Fund, a closed-end fund. There's also a a handful of China mutual funds, such as Fidelity China Region.

(It's worth pointing out that (via the newest Siegel book) $1000 invested in China in 1992 would've been worth $300 at the end of 2003 - despite it being the fastest growing economy in the world over that time.)

I must be confused, because it looks to me as if your position right now is worth $42,650 ($45/share * 1,000 shares - $2,350).

You would need to buy the shares of WMT before you sell them, which are $48.30 right now. If they dropped to $25, you could buy them for $25, then turnaround and sell them to your counterparty for $45 - for the $20,000 profit.
posted by milkrate at 12:57 PM on June 30, 2005

Of course, people who are long in-the-money options usually sell the option on or near the expiry date to someone who has the opposite position (who "buys to close"). Hardly anyone actually wants to take delivery.
posted by Kwantsar at 2:12 PM on June 30, 2005

Also, rkent, the scheme of buying equity securities that are indirectly effected by the revaluation might not be a good one. If the market is expecting a float and/or revaluation, the prices of all the shares of Wal-Mart and the members of the Xinhua 25 will reflect that.

The currency markets will not reflect the expected revaluation, because the PBC is actively preventing the market from reaching equilibrium by manipulating the currency.

In other words, if you expect a revaluation around the same time the stock markets do, you're not going to make any money in stocks. You'll only make it in the market that is being manipulated.
posted by Kwantsar at 2:18 PM on June 30, 2005

I must be confused, because it looks to me as if your position right now is worth $42,650 ($45/share * 1,000 shares - $2,350).

You're confused. You don't actually have any shares, just the option to sell them. Of course this means if you don't sell the option before it expires, you'll have to come up with the shares, but if WMT is selling for $20 at that point, you can do this very very cheaply and make $25 a share. More likely, though, you'll just sell the option to someone else.

If WMT is selling above $45 then the options are worthless and you won't need to sell any shares, but you'll be out what you paid for the options.
posted by kindall at 3:51 PM on June 30, 2005

Everbank claims to "allow you to seek capital gains should the Chinese government change its currency policy. "
posted by Ostara at 5:57 PM on June 30, 2005