.Do You Need a Chinese Bank Account?

Do You Need a Chinese Bank Account?

By BRETT ARENDS, wsj


We're perfectly happy eating in a Chinese restaurant. But will we start banking in a Chinese bank?

It's not as crazy as it sounds. As The Wall Street Journal's Lingling Wei reported Wednesday, the Bank of China here in the U.S. has started allowing American customers to open an account and to invest up to $4,000 per day—and a total of $20,000 a year—in Chinese yuan, or renminbi. Until now, you had few options to hold money in yuan, which is a "closed" currency managed, and protected, by Beijing.The bank has three U.S. branches—two in New York, and one in Los Angeles. You'll have to fill out paperwork to open an account and provide two forms of ID. And there's a minimum deposit of $500.

Is this a good idea? You may wonder why anyone would do this. Investing in Chinese currency may sound like something best left to speculators.

But in reality this may be no more exotic than, say, Peking duck. Holding some of your money in Chinese currency—as part of a diversified portfolio, as they say—might be a very sensible move for all of us.

Why? Five reasons.

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.

Let's take these in order.

• First, it's very unlikely to go down. Of how many investments can you say that? The yuan has very little room to fall farther because it is already seriously undervalued. Beijing has spent hundreds of billions of dollars keeping the currency artificially cheap for years to boost exports.

What's the discount? Nobody really knows for sure. But right now each yuan costs about 15.1 cents. Most economists say fair value is somewhere north of 18 cents—and maybe a long way north. According to the International Monetary Fund, the value of the yuan in real, purchasing-power terms is about 27 cents.

Whatever the details, one thing is clear: Anyone buying yuan today is getting a pretty decent margin of safety. As a kicker, the Bank of China U.S. accounts also come with FDIC deposit insurance, which will protect your deposit from outright forfeit if the bank were to fold (though not from exchange-rate fluctuations).

• Second, it's very likely to go up. Why? China is growing rapidly, is a manufacturing powerhouse and is running an enormous trade surplus. Countries like that usually have very strong currencies. Think of the Japanese yen, or the old German Deutsche mark.

And these days, a rising yuan may be in Beijing's interest. China no longer has the same need for such an artificially cheap currency. After all, the plan worked: It has now taken over a vast amount of manufacturing from the U.S. And it's moved up from making socks and toys to iPads and, now, stealth bombers. (You could argue the main thing the U.S. got in return was a housing bubble caused by artificially low interest rates.) Based on purchasing-power parities, the Chinese economy is now expected to overtake that of the U.S. within six or seven years.

Meanwhile, China's artificially low exchange rate is starting to backfire at home. Politically, the country is under international pressure to rein in its huge trade surplus. That is sure to be an issue when Chinese President Hu Jintao comes to Washington next week. But, more importantly in Beijing, the low exchange rate is also backfiring economically by fueling inflation. This is pouring gasoline on a Chinese economy that is already overheating.

Beijing is trying to tamp down the fires. Letting the exchange rate rise more quickly will help. It ought to happen, so it's reasonable to guess it probably will. In the past five years, China has already allowed its currency to rise 25%. It may have plenty more room to go.

• The third reason for holding some money in yuan: What else are you going to do with it? Interest rates elsewhere are minimal, so you won't be missing out on much. According to Bankrate.com, the highest-yielding six-month certificate of deposit pays just 1.3%, before taxes. The dividend yield on the stock market is 1.7%. You can earn better yields from government bonds—the 10-year Treasury is paying 3.3%—but that's also subject to federal taxes, and you can put yourself at risk from inflation.

In these circumstances, the so-called opportunity cost of having some of your money in Chinese currency, at least for now, has rarely been lower.

• The fourth argument for a yuan account: It makes you more diversified. That's the holy grail of investing. The yuan-dollar exchange rate probably has little, if any, correlation to any other asset in your portfolio. (As a bet against the dollar, it might have some correlation to gold.) The exchange rate between the renminbi and the dollar will follow its own path. This is unlikely to be dictated much, if at all, by developments in stocks or even bonds.

• The fifth and final argument for holding Chinese currency: It may help you offset the costs of U.S. economic decline.

Our share of the world economy, which was 24% a decade ago, is this year expected to sink below 20%—the lowest figure in modern times. We are running a current account deficit of 3.5% of gross domestic product. Our national debt has nearly tripled in a decade, and deficits stretch out as far as the eye can see. Will the greenback survive as the world's reserve currency? Why should it? The British pound didn't.

What makes the issue of decline particularly acute for you and me in financial terms is that we work here. Our financial lives are closely tied to the U.S. economy. Consider: If we still had the 5.5 million manufacturing jobs we lost in the last decade, mostly to China, our unemployment rate today would be far lower.

While trade can benefit both sides, of course it doesn't always do so. It may make sense to make bets within your portfolio that will pay off as China overtakes the U.S.—compensating you, as it were, for the lost opportunities.

What are the risks of opening a yuan account? The principal one is probably the missed opportunity of doing something else with the money. There is still no guarantee the yuan will rise by much any time soon, so you could be sitting on dead money for a long time. And in theory China could always suspend convertibility back into dollars, though the chances of that must be minimal.

As ever, you need to do your own homework and understand what you're getting into. Chinese bank accounts, like Peking duck, aren't for everybody. But they're not crazy.

Write to Brett Arends at brett.arends@wsj.com