Color My Yuan Gold

Those who read my blog certainly know my views on China's role in world economics. I have written on why China can't be the savior of the world and why the Chinese middle class purchasing power has been stifled by a central command policy of keeping the exchange rate range bound. I have also written about the rise of gold and the search for a new alternative reserve currency. With all my not- so- positive views on China there still is a way to profit from a Chinese attempt at giving the yuan a more prominent role in international trade; hoping that one day it will replace, or at least rival, the dollar in international settlements. While I don't believe the yuan is able, as a single currency, to replace the role of the dollar; attempts at doing so by the Chinese government will give rise to both the yuan and gold.

Everyone agrees that a main requirement for an internationalized yuan is free convertibility. That means markets will determine the value of the yuan and that is almost sure to translate into a higher yuan against the dollar. With a still developing economy the question is what will provide the support for such a young currency, on the international platform, to be the trade currency of choice. Of course many other reforms, political as well as economic, have to be implemented first, but the answer was given to us couple years ago when Chinese officials said they will be adding to their gold reserve. That of course makes perfect sense. China still has more poor people than any other country. The Chinese economy is still too immature to provide self support of an international yuan. That support will have to come in the form of physical gold. There is evidence of Chinese accumulation of the metal over the years. The power of the Chinese middle class has been kept in check by a foreign exchange policy that pegs the yuan to the dollar within a tightly managed range. If the Chinese want the yuan to be an international currency, and I believe they do, than they have to let the yuan float. This of course will hurt Chinese exports but will unleash the purchasing power of the middle class. The effect of such policy is not the goal of this article. Here my only objective is to point out that if I am right and China does finally let the yuan float than there is profit to be made. Keep in mind that will not happen overnight or over few months. It is more likely to unfold over a period of few years. But the payoff will be handsome.

There should be room in every investor's wallet for a little Chinese change. Soon you may be able to pay for that "Peking duck" lunch with "Beijing currency". It is easier than ever before to open a yuan account through the Bank of China, New York branch.