Part of my reasons for believing this are stated in this presentation (which has been posted on HN, iirc):
http://dl.dropbox.com/u/6010227/Webshare/China%20Japan%20Pre...
If you got into China 15 years ago, you had no idea how things were going to pan out (and you deserve compensation for holding that risk). If you get in now, there's a more likely chance (I'd argue) that you'll do well, so the risk, and therefore the compensation you deserve, is lower. And holding currency is a lot less risky than equities, anyway.
The people that would be interested in a Yuan bank account up to $20000 aren't really sophisticated investors anyway.
Your argument would make just as much sense without these words, and leaving them out would help keep HN a place for civil discussion.
Lets take the dot-com boom as an example. There were people saying that dot-com companies were overvalued in 1997, when the Asian currency crisis hit. Those people were, in retrospect, probably right. However, the next two years made them look like complete fools, as the bubble maintained exponential growth for another two years before completely collapsing.
Same thing with China. Yeah, the bubble might have another couple of years left. If you get in now and get out when the crash hits you'll make a modest profit. But, if you mistime the crash, you could stand to take huge losses, as the value of your currency investments falls far below the price you paid for them.
My bucket:
FXI is a China fund
EEM is an emerging mkts fund
EWS is singapore
or you could just assume that the Chinese will want meat so you buy MOO
or you can spec on the Yuan directly with CYB.
Plus, rather than speculating on a currency, you're actually purchasing a piece of a foreign company's productivity.
Imagine average Joe investing in a very non-diversified portfolio of one stock which he has decided he likes, perhaps due to personal knowledge of the firm.
Over time, odds are this stock will do poorly compared to if he'd had a more diversified portfolio.
It's the same general law of markets that is why it's generally better to invest in index funds... they benefit from overall increases in productivity and economic growth, without being subjected to all the risks that less diversified portfolios suffer from.
Of course, it's always possible to formulate a 20/20 hindsight critique of diversification b/c there is always an investment or two that retrospectively looks like it would have been an obvious sure thing to a layperson.
How are you calculating these odds? I'd naively assume that the average performance would be the same but the volatility would be much higher. Dollar cost average into it and you reduce this somewhat. I've never really understood the magic of diversity either, unless it's just to insulate against risk of ruin.
Diversification means I need to give the stock broker more money. That's all it means to me. I understand the risk aversion concept. You don't need to "educate" me.
Telling lay people (as you call them) that they need to do this or bad things will happen is the perfect scam. Create disonance and then offer a solution.
"Repent and ye shall be saved." "Diversify and ye shall be saved." I don't buy either argument. I got out of the market in 2000, never been back. Never will.
Edit... and yes, I owned index funds, but they wanted me to buy more index funds to further diversify my holdings. I learn quickly. That's always been my problem.
Anticipating your next question, yes, in general, historical risk has a high R2 with actual risk, where risk is defined as being normalised to an index.
It's very unlikely to go down.
It's very likely to go up.
You won't miss out on a lot of interest elsewhere, as nowhere else is paying a lot of interest.
It will diversify your portfolio.
And, finally, it may offer you and your family something of a hedge against the decline of the U.S. economy.
The government doesn't feel any of this pressure, as it's not an internal issue they don't care.
I would argue that yes the yuan is likely to rise against the dollar, but because of high inflation (very very high in China) most assets would also rise in comparison to the dollar(Oil, Gold, Silver etc.)
Actually the only good reason to invest in the yuan I would think is diversification. It's not a good idea to keep your investments as cash during a time of high inflation.
In January 2006 Gold was $525, January 2010 it was $1125
Silver, January 2006 $9, 2010 $17, most assets are climbing fast in relation to cash, much faster than 25% over 5 years.
My business partner just sold an apartment in Beijing. I tried to convince her to buy up some land back in the US, but she chose to buy another apartment here instead. Part of her concern was that the US housing market was going to be relatively flat for the next couple of years, which is her desired time range for selling the new property. The future potential weakening of the dollar vis-a-vis the RMB also played a role.
http://www.marketwatch.com/story/rent-prices-rose-12-last-ye...
Sugar Prices Hit 30-Year Highs
http://online.wsj.com/article/SB1000142405274870350690457559...
Gasoline Tops $3 a Gallon for First Time at Christmas
http://www.dailyfinance.com/story/3-dollar-gas/19775116/
Unless you believe the official US CPI, which excludes food/oil
Their deep reason for that is turning Shanghai in the world's leading financial center.
US dollars, devalued as they are, are still the reserve currency of the world and most importantly, oil is still denominated in USD.
So basically they can print up as many yuan as they can sell, and exchange paper with pretty pictures on it, for oil and other commodities they can actually use.
Can I buy and sell RMB from/to your bank?
Yes, you can exchange USD for RMB or exchange RMB for USD at our bank.
The rumor is that the $20K per year investment cap is limited only to individuals and not institutional investors and funds. Furthermore, if there is massive demand, it is expected that those caps will be raised.
What is unclear is how your yuan can be used to make investments in China itself?
It seems unlikely the Chinese have a need for many dollars flowing to them. I mean, look how many they have - unless something truly weird is going on...
To my untrained eyes, it makes the idea of diversifying into anything other than the US dollar seem like a good idea. But to be honest my understanding of the US monetary system gets fuzzier the more I learn about it.
Just as price is a function of supply and demand, so are exchange rates. The money supply is independent of the price of goods and of the price of currencies (exchange rates).
Seemingly, a larger overall quantity of dollars in existence would seem to predict a decline in the value of the dollar relative to other currencies, but the monetary policy decisions that resulted in increased money supply are intended to achieve relative price stability.
For example, the dollars introduced to the economy and lent to banks had the effect of encouraging banks to make loans, which helped increase demand for products and services, which helped prevent prices from falling.
Also, many of the dollars are being used as reserve capital after the market price of various securities which had been used as reserve capital declined, leaving the entities under-capitalized. All this was done in an attempt to keep interest rates low (in effect a price target) and prevent banks from being forced to stop lending money...
So I think the bottom line is that the behavior of consumers and firms can account for so much variability in supply and demand that the money supply can expand greatly and prices can still say roughly constant... the other side of the coin being that monetary policy was used to keep prices relatively stable, in this case by keeping the credit infrastructure status quo alive.
edit: Of course, if the Fed gets it wrong or lacks the will to raise interest rates when necessary, hyperinflation can result, which would impact exchange rates.
Hasn't HSBC had a fairly significant US/Canada presence for a while?
The current president 'Hu Jintau' controls the exchange rate through China's currency policy which dictates how many USD an owner of Yuan can get in exchange.
So buying yuan is a bet that the peg will be removed and the USD will be printed so much that nobody will exchange human labor for it.
It could work, but I'd buy physical gold before the yuan.
China's economy, to me, seems like a leverage play on the US. If the US economy seriously stagnates, China's economy will follow suit, and likely in a much more dramatic fashion. The opposite is also true, when the US consumers get to spending China (at least for now) stands to benefit tremendously.
For me, the best option if you are looking at foreign currencies, is to go buy a brazilian government bond and get 10% on your money in 3-5 years.
As always, great advice from WSJ: I will have one million dollar in my account in 5 years - if I start with two millions.
