Should you invest in non-convertible currencies?

Reporting from: Nong Khai, Thailand – en route to Myanmar

I have to admit, I screwed up yesterday.

In my rush to get out my last meeting in Vientiane, Laos, and to the airport in time for my flights, I forgot about the Lao currency I was carrying in my wallet. The currency of Laos, the Lao kip, is a non-convertible currency and not accepted anywhere outside of the country.

Not at most places across the border in Nong Khai. Not anywhere. No one wants it.

In fact, more than half of the money on deposit in Laos isn’t even held in Lao kip.

Most places in Laos accept US dollars or Thai baht in addition to Lao kip, which means foreigners never really carry much in the way of kip to begin with. But change is given in kip.

So a last minute purchase on my part left me with about $25 in Lao kip that aren’t exchangeable outside of the country.

The Lao kip is one of a number of non-convertible currencies that are blocked from free market trading on the forex market. And while most people realize such a currency is the mark of bad government, I see too many questions swirling around the internet about some kind of hidden potential ready to be unlocked in such non-convertible currencies.

There have been plenty of hucksters trying to sell such non-convertible currencies over the years… from the Iraqi dinar to the Vietnamese dong to others.

The sales pitch usually goes like this: “imagine if this currency reached just one cent on the dollar” or “imagine if this currency JUST reached its former glory”.

It’s true that there was once a time when the Iraqi dinar was a relatively valuable currency. Those days are in the ash heap of history. You could probably see that coming when the government got overthrown in a coup and thousands of bombs were dropped on the place.

The idea that a non-convertible currency like the Iraqi dinar is a suitable investment is laughable. And the idea that you’d have trusted the Vietnam Central Bank not to tank their currency – which they did – is not a sound investment philosophy either.

I’m not a big TV guy – in fact, I haven’t turned on a television since I last left the USSA – but I make sure to catch every episode of the business reality show Shark Tank.

One thing the venture investors on the show are constantly admonishing their prospective partners about is the fallacious business argument “if I could only get 1% of such-and-such a market, we’d make a lot of money”.

Simply pulling a number out of the air and hoping to achieve it is a sure route to failure. In the same way an underwear company with $20,000 in sales since inception isn’t going to pry away a full percentage point of share from brands like Calvin Klein and Victoria’s Secret, the idea that buying some non-convertible currency and hoping for the best is ridiculous.

My suggestion to consider becoming a frontier market entrepreneur is based on doing so in spite of local governments, not because of them. There’s no doubt that Laos’ communist government is a problem when it comes to things like currency.

Starting a small business that grows over time isn’t something that’s on their radar, which is why I recommend it. After all, at least Laos has “communist” right in the name. Do you really think the state of California isn’t essentially a communist state when it comes to doing business?

The one non-floating currency I do have hopes for is the Chinese yuan. Of course, China has 1.5 billion people and is taking over the world. And the average westerner could find it on a map, something the boiler room currency salesmen know you couldn’t do with Laos.

That said, I think the better way to play the Chinese yuan is through the Hong Kong dollar. Hong Kong, which runs a pretty tight ship as far as monetary authorities go, has had to soak up tons of US dollars to keep up with Bennie Bernanke’s Ink Jets.

As the United States is forced to loosen its vice grip on the world economy, Hong Kong especially will likely see the value in de-pegging from the dollar and instead latching on to the yuan.

Chinese money is already flowing into Hong Kong like water pouring over one of the Mainland’s ambitious dams. RMB (Chinese renminbi) finance dominates the market. The US dollar and the English language are becoming increasingly irrelevant in Hong Kong.

If you want to hold Chinese renminbi, there are actually several very conservative ways to do it. If you’re comfortable keeping your money in The Land of the Free, the New York branch of the Bank of China accepts Chinese currency deposits, and the account is FDIC insured.

There are a few Hong Kong banks where you can open an account, including multi-nationals, and bank in renminbi. If you have some Mainland China exposure, you could even open a bank account there.

While I’m a fan of the Chinese renminbi as a long-term trade, I’m not extending that interest to other non-convertible currencies.

A few of my frontier market friends are sitting on their hands waiting for the day they can start gobbling up real estate in even more frontier markets like Iraq.
However, don’t mistake our enthusiasm for business in countries like Laos As an indication to involve yourself in other aspects of the country – currency included.