The Demand For Yuan Grows Globally (CYB, UUP)
Tony Daltorio: Central banks in the emerging world have started moving away from the U.S. dollar and toward another currency.
That currency is the Chinese yuan, known in China as the renminbi. The movement has occurred as China began allowing conversion of its currency for investment.
Some emerging market countries believed to be moving some of their reserves into the yuan include the Philippines, Thailand and Nigeria.
The yuan will appreciate because of China’s “well managed” economy, said Lamido Sanusi, Nigeria’s central bank governor. Philippine finance secretary Cesar Purisima said in a recent interview that buying yuan was “prudent.”
Investment has become easier for emerging market central banks as the amount of so-called “dim sum,” yuan-denominated bonds has tripled to 115 billion yuan ($18 billion) so far this year. Additionally, institutions such as central banks were granted quotas to invest inside China itself.
The average yields on these dim sum bonds, as of the end of August, was roughly 3.22%, compared with the yield on the two-year U.S. Treasury note, which is hovering near 0.20%.
The yuan’s 6.2% rise against the dollar (NYSE:UUP) in the past year is also boosting investment by emerging market central banks into yuan-denominated bonds.
The growing dim sum market is all part of Beijing’s long-term plan to make the yuan fully convertible. Chinese officials told EU company executives earlier this month that the yuan will achieve “full convertibility” by 2015.
The plan seems to be proceeding on schedule. “One of the steps to internationalize renminbi is to allow more central banks to hold renminbi as part of their reserves,” said Brian Baker, chief executive officer at PIMCO Asia Ltd.
Tee Choon Hong, head of capital markets for northeast Asia at Standard Chartered Bank said the process is only just beginning. “We have seen some central banks already go into action by starting the process of taking renminbi as a reserve currency, albeit at an early stage,” he said.
Even China is surprised by the speed of events. People’s Bank of China governor Zhou Xiaochuan stated a few days ago that the offshore yuan market is “developing faster that what we had imagined.”
Investors looking to play yuan appreciation can do it through an ETF –- the WisdomTree Dreyfus Chinese Yuan Fund (NYSE:CYB).
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