Mainland investors hungry for assets denominated in US currency

By Xie Jun Source:Global Times Published: 2016/12/21 18:23:39

Dollar hunting

As the yuan's depreciation trend has intensified in 2016, many domestic investors have started to put money into US dollar-denominated assets, such as insurance, stocks and real estate. Much of the investment has been legitimate, but some has violated laws governing overseas investment. Recently, the central government vowed to keep the US dollar-yuan exchange rate at a "reasonable level," so it has grown stricter about controlling capital outflows. At the same time, it is seeking to lowering expectations for further yuan depreciation.

Photo: CFP

Photo: CFP

A Beijing resident surnamed Xie has bought about $100,000 worth of US currency since the middle of 2016.

When he started buying the greenback, each US dollar cost him about 6.58 yuan. "I judged that the yuan would depreciate further, so I decided to exchange some yuan for US dollars," said Xie, who works at a securities firm and didn't want to disclose his full name.

Xie left the money in the bank for future use, maybe for his children if they end up studying abroad, Xie said.

Many individuals and companies in China have been buying US dollars with the expectation that the yuan will depreciate further, which has resulted in a hastening decline in China's foreign exchange reserves.

China's foreign exchange reserves stood at $3.05 trillion at the end of November, down $69 billion from the end of October, according to the People's Bank of China (PBC), the country's central bank. It was the fifth straight month that the reserves had fallen.

On Wednesday, the PBC set the yuan's central parity rate against the US dollar at 6.9489, which was down nearly 7 percent from the rate set on January 4, according to central bank data. The yuan has been depreciating against the dollar since mid-August 2015, when the government revamped the yuan's central parity rate mechanism.

Xie has made money on the currency exchange, though he doesn't expect big returns. "Nowadays, the yield on most domestic financial products is low. Considering how much the yuan has depreciated against the US dollar, the yield on US dollar exchange is almost the same as financial products in China," Xie told the Global Times on Monday.

However, Xie sees only limited room for the yuan to depreciate further. That's why he has stopped buying the greenback, at least for the time being.

"I will see in January," he said.

The US Federal Reserve announced on December 14 that it would increase its benchmark interest rate by one-quarter of a percentage point, taking the Fed's target rate to 0.5-0.75 percent.

Desiring the dollar

Chinese mainland residents have several ways to invest in dollars besides deposit, including overseas insurance, US stocks, US real estate, dollar-denominated financial products and the Qualified Domestic Institutional Investor (QDII) fund, said Liu Jian, a senior research fellow at the Bank of Communications.

"Mainland investors' allocation of US dollar assets has always existed, but as depreciation expectations weigh on the market, those moves have intensified a great deal," Liu told the Global Times on Monday.

A white-collar worker in Beijing surnamed Zuo, who didn't disclose her full name, bought a dollar-denominated insurance policy in Hong Kong in 2015.

"I bought the insurance not because of the latest round of yuan depreciation, but because I needed some US dollar assets to balance my portfolio. But now that the yuan has been depreciating against the US dollar and this trend is very likely to continue, I am considering buying more," Zuo told the Global Times on Monday.

The insurance broker who sold Zuo the policy said that her company's insurance has grown even more popular with mainland investors recently.

"Nowadays, if you want to buy my company's insurance products, you will have to make an appointment about 10 days in advance. There are too many customers," she told the Global Times on Monday on the condition of anonymity.

Zuo said that she didn't care much about the interest rate of the insurance she bought. "I was attracted by the fact that it's a US dollar asset," she said.

Zuo has considered other investments such as US stocks, but didn't go through with it. "I think US stocks are more suitable for investors who have a deep understanding of certain industries," she said.

Besides insurance and stocks, Chinese investors are also pouring money into the US real estate market. According to a report by the Wall Street Journal in August, completed US commercial property purchases by Chinese investors jumped 19 percent year-on-year to $5 billion in the first half of 2016.

According to the report, investment from China into US commercial property is continuing "unabated" as companies and individuals try to "diversify" out of China.

Managing expectations

As mainland investors grow more interested in dollar assets, there are still some headwinds back home, said Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology. The central government, for example, has been seeking ways to stanch the flow of money out of China.

The rate of capital outflows has grown a bit fast over the last two years, Dong said. Facing a weakening yuan, some mainland investors have turned to illegal channels to move assets abroad.

 "The Chinese government used to be lenient toward these activities. But now they are tightening rules for US dollar investment," Dong told the Global Times on Monday.

For example, China UnionPay International, a subsidiary of China UnionPay, has adopted restrictions on single transactions recently to curtail mainland residents' investment in Hong Kong insurance policies.

Liu said that the Chinese government must take measures to control expectations for the yuan's depreciation to rein in capital flight. "I don't think they will allow the yuan to depreciate much more than it has this year," he said.

Dong said that pressure on the yuan to depreciate has subsided, and there's not much space left for it to weaken further. "I predict the yuan will trade around 7 yuan against the US dollar in 2017," he noted.

He also said that the recent US interest rate hike was just the beginning. Further increases might put more pressure on the yuan, but overall domestic economy is independent and won't be overly influenced by the US central bank.

Following the Chinese government's annual Central Economic Work Conference, which ran from December 14 to 16, officials vowed to keep the yuan's exchange at "a reasonable level," while increasing flexibility of the exchange rate, the Xinhua News Agency reported on Friday.


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