Move Over Dollar, Euro, and Yen

03/21/2013 9:50 am EST


Keith Fitz-Gerald

Chief Investment Strategist, The Money Map Report

Your financial future will be built upon the Chinese yuan, writes Keith Fitz-Gerald of Money Morning, who explains how investors can cope with this fundamental change.

Lately, people have been talking in angry terms about the huge piles of cash US corporations hold offshore.

Most are frustrated that corporations find it more profitable and less risky to keep it there. They don't draw the connection between that cash and redirected wealth. Apple (AAPL) is the poster child, with over $137 billion in the bank-and some 70%, or $94 billion, held offshore.

What people don't realize is that huge chunks of cash are held in other currencies, chief among which is the yuan. It's so much that US and foreign firms already hold four times more Chinese currency than they can invest in that country, as reported by Nick Edwards of Reuters.

It's hardly by coincidence that Yuan-settled trade jumped 41.3% to nearly 3 trillion yuan in 2012...after it increased by more than 300% in 2011.

The cold, raw reality is that Western demand for Chinese currency is actually fueling the yuan's rise. The perfect storm of punitive taxation, chronic debt, a morass of regulation, and the uncertainty it creates is pushing money away from the United States. Meanwhile, newly punitive problems in the euro are creating a flight off the continent.

The dollar lost more than 80% of its value since being taken off the gold standard in 1971. Our nation is $222 trillion in the hole, according to Yale Professor Lawrence Kotlikoff's analysis of CBO numbers. Our national debt has skyrocketed to more than $16.652 trillion, and is increasing at something like $50,000 a second.

The euro is singing only a slightly different tune. According to the Maastricht Treaty, national public debt is not to exceed 60% of GDP for any member state. Yet, at the end of 2011, Greece, Italy, Ireland, Portugal, Belgium, France, the UK, Germany, Austria, Cyprus, Spain, and the Netherlands all had government debt greater than that, as high as 165.2%.

And Japan's in deep, too. With total combined private, corporate, and government debt near 500% of GDP, the yen is living on borrowed time.

But the yuan has risen 24.66% against the US dollar since June 2005, backed in part by 1.3 billion consumers and real assets. That's because strong currencies attract capital, while weak currencies shed it.

China's quietly built up more than 18 swap agreements. In fact, HSBC forecast (in 2010) at least half of all trade with emerging markets could be settled in yuan by 2013 to 2015, which would be up from only 3% in 2010.

China's making ready to trade the yuan freely by 2015, from London of all places. That means in less than two years, the world will have another currency to contend with. But understand that the Yuan has only just begun to grow-as an exchange mechanism, as a cultural influence, and as a trading tour de force.

Here are a couple of ways that individual investors can make the Yuan a part of their investing future:

  1. Invest in the "glocals"-companies like General Electric (GE), ABB (ABB), and McDonalds (MCD) with global brands and a highly localized presence. They're the ones accumulating the yuan, so it only makes sense to build upon the economic power base that represents.
  2. Buy an ETF like the Wisdom Tree Dreyfus Chinese Yuan ETF (CYB).

Read more from Money Morning here...

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