Stop By Your Local Bank of China

The news is in. Even you can open an account at the Bank of China in New York or Los Angeles. But you have to hurry, trading will be limited.

What does this bank account entail? According to the Wall Street Journal,

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.

To try to understand what’s at play here, let us determine who gains what. For the Chinese, some might see this move as a clear indication that they want more US dollars. After all, China is a developing economy, and with that comes expenses. These expenses to a large degree are outside goods and services with companies that settle their contracts in dollars. This would be a very shortsighted intuition.

The Big Picture: China is beginning to internationalize the yuan in an attempt to turn it into a new formidable world currency. Opening Chinese banks to American customers is one small step for the yuan, one giant step for China.

How should the average investor look at this move?

Let’s look at a key statistic- gross domestic product. According to China’s State Statistical Bureau (SSB), 2010 GDP growth was 10.3 percent, bringing the economy to just over $6 trillion. Now you can’t always trust numbers that come out of China (might as well have come from behind the Iron Curtain), but we can surmise out of good reason that it is in the interest of the Chinese government maintain this level of growth. To accomplish this, the Chinese must maintain a high volume of exports that is partly dependent upon a low, and in this case, controlled currency value. It is unlikely that the yuan will rise considerably, especially against the dollar.

The yuan will not rise against the dollar because 1) the yuan is pegged to the dollar 2) Chinese easily hold over $2 trillion in US denominated assets, increasing the value of the yuan would be a gross display of stupidity because the yuan value of their foreign exchange holdings would plummet.

Now if you’re not Gordon Gekko, you most likely have not been too concerned with the yuan outside any nominal mutual fund exposure to Chinese markets. But today you have the opportunity to convert your greenbacks. Should you? That’s another question.

Brett Arends of the Wall Street Journal outlines five reasons to open a Chinese bank account. According to Brett,

It may offer you and your family something of a hedge against the decline of the U.S. economy.

Let me guess Brett, if you can’t beat them, join them? Sorry, not interested.