Two currency diversification plans to consider in 2014 and beyond

Written by Andrew Henderson

Dateline: Taipei, Taiwan

I’m a fan of gold and other ways of protecting my hard-earned capital from the “easing” policies of the Fed and others. In fact, several hours of our upcoming Passport to Freedom event in Las Vegas are about how to store gold offshore, the best types of gold to own, and how to use Bitcoin.

However, I also freely admit that I hold fiat currency and that I diversify my money across different currencies. While my friend Charles Goyette (one of the speakers at the conference) is correct in saying all fiat currencies are sinking ships, there are ways to profit from the ongoing stoogery of central banks.

While 2014 looks to be a better than deserved year for the US dollar due to Wall Street’s relief over a grand total of 11% of the funny money pumping being “tapered”, I believe holders of US dollars should consider diversifying their currency structure now more than ever.

For as much as the “experts” are singing a song of recovery for The Land of the Free, currency analysts are suggesting that the Canadian dollar might actually fare better than the US dollar in the upcoming year. The idea is that a rising tide lifts neighboring boats, and that Canada will get a proportionally larger boost as all of the alleged good tidings from Amerika head north.

However, with 2014 now here, I’m beginning the year by looking at two currency diversification strategies for my portfolio.

Currency diversification in Chinese renmibi

You can’t walk around Hong Kong with bankers there talking about Chinese renmibi, and for good reason. The Chinese want their currency to be the new global standard for settling transactions, and are easing currency restrictions to make that happen.

Ten years ago, the renmibi was a blip on the radar in terms of internationally exchanged currencies. Recently, it climbed as high as tenth place.

China recently entered into a deal with Europe to exchange renmibi with euros under a currency swap mechanism.

And central banks in Chile, Nigeria, and Thailand have already diversified reserve currency assets into renmibi (also known as Chinese yuan, or “money”).

In just the three years since China allowed companies to pay for imports and exports, transactions settled in Chinese renmibi have hit 15%, and HSBC expects that figure to double in the next four to five years. The potential for the renmibi to dethrone the dollar is something to seriously consider.

I’m sure there are people from the Fox News crowd who read this site and think I make financial decisions based on “blame America first”, and that I’m pro-renmibi only because it will lead to the downfall of the dollar.

The reality is that, once you leave the United States, most people are relatively agnostic about geography. What I mean is that they aren’t as married to the idea of the dollar being the reserve currency, or the renmibi being the reserve currency, as the United States is.

For example, Chile is already hedging its bets. It’s not because they “hate America”; it’s because they see the future. Many countries here in Asia already would feel more comfortable dealing in renmibi. Many companies here are already settling their business outside of the dollar.

Also, many Asian economies have some of the world’s best balance sheets.

I do expect there to be some volatility in the renmibi as it becomes more significant on the global stage. The central bankers in Beijing closely manage the currency and have been slowing appreciation lately on deflation concerns. However, the facade of economic growth in the west could lead to slightly stronger appreciation in 2014. China’s economy itself should pick up, too, a sentiment Jim Rogers recently echoed.

Analysts have called for two to three percent appreciation in the yuan in 2014.

Export concerns are one reason to believe the Chinese will keep their currency weak, but that hasn’t been the case lately, and as more trading opportunities open up in emerging markets – especially close to home – I believe it will be less of a concern. The Chinese need a rising renmibi to keep their growing economy in balance.

You can hold Chinese yuan directly in offshore bank accounts in Singapore, Hong Kong, and elsewhere. You can even open an account at most of the larger banks in Mainland China, although things start to get tricky then… specifically when it comes to getting your money back onshore.

If you’re looking for a pure currency diversification play without the offshore advantage, the Bank of China USA in New York offers renmibi-denominated deposit accounts that come complete with FDIC insurance (if you think insurance underwritten by a bankrupt government would be worthwhile if they had to trash the currency even further to pay beneficiaries).

If you want to get fancier, you can buy renmibi non-deliverable forwards from, say, a bank in Hong Kong, and make a bet on the currency’s direction. Of course, there is an element of timing in this play as well, and I prefer to eliminate counter party risk, no matter who owns the bank.

Heck, I wouldn’t be opposed to stashing 20,000 RMB (US$3,300) – the maximum you can take out of Mainland China, or Taiwan for that matter – in a suitcase and putting it in your safe. It’s not the most sophisticated play, but there are plenty of people holding greenbacks under their mattress, as well.

For currency diversification that bets on a stronger Chinese economy and less central monetary planning in the long-term, you might consider adding renmibi to your currency basket.

Currency diversification in Hong Kong dollars

For a bit of a different play, but still pegged to China, Hong Kong dollars have long been bandied about as a relatively stable way to hold “safe haven currency”.

Jim Rogers once mused that in today’s world, there is no need for a Hong Kong dollar. He suggested that Hong Kong adopt the Chinese currency even before it becomes fully convertible. Indeed, a special administrative region of “One China” having its own currency while bankers run around pimping renmibi on every corner seems odd.

As Hong Kong is increasingly connected with China, the renmibi is playing a bigger and bigger role. For example, exporters who fill container ships in Hong Kong’s industrial bays buy their goods in yuan, and add a premium to orders paid for in US dollars to account for currency appreciation.

More experts are coming out and saying it’s only a matter of time before Hong Kong drops their dollar’s peg to the US dollar, which is basically 7.75 to 1.

For one thing, Hong Kong’s red hot property market has seen excessive cooling measures as a result of the Hong Kong Monetary Authority’s requirement to buy worthless US dollars to keep their own Hong Kong dollar at the peg. With savings rates at zero, money has flooded into the Chinese’s favorite safe haven – real estate.

The bottom line is that the Hong Kong dollar could re-peg from the greenback to the renmibi – or outright the renmibi outright – and see an instant bounce. One renmibi currently buys 1.28 Hong Kong dollars.

While changes in the current structure could change my plans, I’m working toward an ultimate goal of fully making Hong Kong dollars my base currency. The downside is pretty limited for holders of US dollars since currency risk is not an issue currently.

Yet I don’t see any way for you to lose if – or when – the renmibi takes over in Hong Kong.

Unlike the ninnies at the Fed and the ECB, the guys in Hong Kong are a bit savvier and see the direction the world is headed.

As a new year’s resolution, I suggest everyone holding a dying currency like the dollar create their own safe haven currency diversification plan. Personally, I prefer Hong Kong dollars as a base currency for now because of the greater stability.

While I do like Singapore, I see some mild fluctuations in the Singapore dollar in the next year as the markets go ga-ga for American dollars on the back of QE tapering. I don’t expect this to hold the Singapore dollar down forever, but it is worth noting.

Andrew Henderson
Last updated: Dec 30, 2019 at 5:14PM

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2 Comments

  1. Simon Vaillancourt

    While the main currency in my basket is the SGD (I’ve had an amazing run in the last few years!), I’ve been moving slowly towards making the RMB my main currency. A great advantage of the RMB that you didn’t mention in your article is that international ATM fees are much lower for Unionpay cards than for Visa/MC/AmEx. Even in Thailand I do not have to pay the 150thb fee for foreign cards when I use my Unionpay card (issued on the mainland).

    • Andrew Henderson

      The SGD has had a nice run recovering from the post-2008 foreign currency collapse. You are right on Unionpay, and if you’re not using an AmEx Platinum or other card that waives foreign currency fees, spreads on those cards are usually lower, too. That said, I just met a guy the other day complaining that HSBC has moved over to Unionpay and their ATMs are hard to find. Thanks for the comments.

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