The short version
- The yuan or renminbi is China's currency and is one of the currencies traded in forex.
- China's economic growth in recent years makes the yuan an attractive currency for investors.
- The Chinese government takes an active role in making sure the exchange rate is favorable for Chinese exports, which can limit upward price movements.
- There are multiple ways to invest in the Chinese yuan, including directly purchasing the currency, buying currency ETFs or mutual funds, and investing in emerging Chinese stocks.
Should I invest in Chinese yuan?
For investors in the U.S. or anywhere outside of China, the Chinese yuan (sometimes called “the renminbi”) is available as a foreign exchange investment. In foreign exchange — often called “forex” or “FX” — investors buy a foreign currency with the goal of the currency becoming more valuable compared to their home currency. Just as a share of stock can go up in value, so can the relative value of a currency.
The Chinese currency has two names. But few people make the distinction. If you want to be technical, use “renminbi” when you refer to the currency itself. And use “yuan” when you're talking about the amount of money or cash. Since this article explains buying some amount of money as an investment, we use “yuan.”
Currencies tend to go up and down based on global economic conditions, the country's economic conditions and the country's fiscal and economic policies. For example, the value of the U.S. dollar is heavily influenced by the American economy, government policy and Federal Reserve policy.
China's economy has been on a massive growth streak for decades. And it's positioned to remain one of the most powerful economies in the world for the foreseeable future. Moreover, strong and growing economies tend to maintain strong currencies. China's strong economy makes the yuan attractive to foreign investors.
FX investors should heed a word of caution that's both a positive and negative for investing in the yuan. The Chinese government takes a very active approach in managing the nation's currency and forex rates. Government officials work to keep the yuan exchange rate favorable for Chinese exports. This limits upward price movements for the currency.
How to invest in Chinese yuan
If you've done the research and decided that the yuan is right for your forex portfolio, you have a few options for how to invest in Chinese yuan. Here's a look at some of the most popular options for buying yuan as an investment.
Currency ETF or mutual fund
The easiest way for most investors to get exposure to yuan in their portfolio is through an exchange-traded fund (ETF). You buy an ETF through your brokerage account just like buying a stock. But instead of buying a company, you buy yuan or a basket of currencies that includes the yuan.
For example, the WisdomTree Chinese Yuan Strategy Fund (CYB) allows you to invest in yuan through your brokerage account. The fund charges a 0.45% annual management fee. Or look to emerging market currency ETFs and other foreign exchange and currency funds to invest in yuan with relative ease and low costs.
Futures and options
Futures and options are advanced trading strategies not suitable for the typical passive investor. With these instruments, active investors use leverage to increase their potential gains. But leverage also increases risk.
With currency options, traders pay an upfront fee for the option to buy a currency at a specific price on a specific date in the future. If the bet is a good one, the option is “in the money” and can be exercised for a profit. If the bet is bad, you simply let the option expire. You lose only what you paid for the option.
With futures, you also pick a specific price and future date. But you must make the purchase on the maturity date, no matter whether the bet goes the way you want. You get no choice with a future.
You can trade options through most major brokerages, like E*TRADE or TD Ameritrade, though you may have to apply for options privileges. Futures are riskier and offered by a more limited set of brokerage firms.
Direct Yuan investments and cash holdings
With a forex account or an account at a brokerage that supports direct forex trading, you convert your dollars into yuan directly with a few clicks of your mouse. If you do, be aware that currency markets operate around the clock and can move quickly. As with futures and options, this is considered a risky investment strategy and isn't suitable for the typical investor. If you decide to invest in forex, don't fund your account with more than you can afford to lose.
Or buy and hold physical yuan. Some banks and currency exchange businesses offer this service. Beware of fees when using a dedicated in-person currency exchange store. If you do hold physical yuan, use a fireproof safe or bank safe deposit box to keep your money safe and secure.
Emerging market stocks and bonds
If you prefer to stick with stocks and bonds, invest in a Chinese company or a Chinese bond. Doing so gives you investment exposure to both the underlying asset and the Chinese yuan.
For more diversity, buy an emerging market ETF that either includes China among its target investment countries or focuses on Chinese stocks or bonds.
Gold mining and energy stocks
Among Chinese stocks, the energy sector has performed particularly well. China is notable for its enormous population. This leads to a massive demand for natural resources and fuels like oil. Even as China slowly moves to sustainable energy, fossil fuels will remain in high demand in China for many years to come.
Mining stocks are also a good place to look. Gold mining is a major Chinese industry, as are rare earth metals. These metals are located in just a few places around the globe, with a heavy concentration in China. That makes Chinese miners an even more likely high performer in the future.
More: Best online stock brokers
Yuan digital currency
Cryptocurrencies are a modern type of currency powered by computers and a technology called “blockchain.” China appears to be one of the first countries to adopt blockchain for its own national currency through a growing digital yuan program.
The cryptocurrency version of the yuan opens up the currency to international investors with the right tech-savvy to buy and hold digital yuan in their cryptocurrency wallets.
Stay knowledgeable about yuan
Government policy in China can change instantly. This makes investing in Chinese yuan arguably riskier than other currencies. However, if you decide to invest in the yuan, it's important to follow economic and government news from China to ensure your investments are still poised to perform as you originally expected.
As long as you understand the risks and have a solid investment strategy, there's no reason the yuan couldn't be part of your diverse international portfolio.