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In the US Presidential election campaign there has been a lot of talk about the strength of China’s currency. Last week, the US Treasury Department delayed its semi-annual currency report until after the elections. While falling short of allegations that China is a currency manipulator, the report has previously made repeated claims that the Chinese government deliberately keeps the value of the renminbi low to boost exports. The issue is a highly sensitive political subject in the US and has become a headline-grabbing issue in the election race.
American politicians are not alone, international finance experts are virtually unanimous in the view that the renminbi is undervalued on world currency markets. The Economist Magazine’s Big Mac index that famously measures the relative strength of currencies against the cost of the MacDonald’s hamburgers around the world, reported in July the renminbi was undervalued by as much as 40% against the dollar.
The rate of exchange between the renminbi and the rest of the world is currently controlled not by a free currency market, but by the Bank of China that dictates the permissible daily trading range. It is therefore a servant of government policy to keep demand for China’s industrial goods high by ensuring competitive prices internationally.
However, there are increasing signs that over the next 5-10 years there is likely to be an adjustment on the value of the renminbi to more accurately reflect its value on the international markets. This is expected for a number of reasons, not least international political pressure from the US and other major trading nations.
Another factor in realignment of the renminbi is a shift in China’s economic policy. The enormous trade imbalance between China and the rest of the world has resulted in China accumulating over US$3tn of foreign currency reserves; an imbalance that causes an unhealthy mutual dependency for China as well as its deficit-running trading partners. The government wants to reduce the dependency on exports by boosting domestic demand and part of the 2011-15 national economic plan involves the steady appreciation of the renminbi.
All of the above suggests that there is a considerable upside in gaining early exposure to the renminbi, however the problem for many is finding a suitable vehicle for making the investment. This is something we have been considering at Infinity and we have identified a product that we believe may fit the bill. Last week, Standard Life released the Smart Wealth Renminbi Five Year Endowment Policy. It allows investors in Hong Kong to gain exposure to the renminbi and pays a guaranteed annualised rate of return of 2.8%, an attractive rate in these times of low international interest rates.
Premiums are payable in two tranches in the first and second year, with the minimum single premium being 40,000 CNY (approximately US$6,375). The maximum premium is 2.5mn CNY (US$398,500). There is also an option to pay the second year’s premium at the outset with the policy paying 3.5% per annum for the first policy year.
The policy pays a death benefit equal to 100% of any balance of pre-paid premiums without interest plus 100% of guaranteed cash value. There is also an additional accidental death benefit.
Please take a look at the plan’s brochure for more details and if you are interested, get in touch. However, time is short as the plan is offered for a limited period only, closing on 3rd December this year.
This product is only available in the Hong Kong Special Administrative Region and the content of this article is not relevant to readers who are not resident in this jurisdiction.
Information provided by Infinity Financial Solutions Limited - CIB No 0462, does not constitute financial product advice. Investors should consider their own investment objectives, financial situation, requirements and particular needs before acting upon any information provided. Investors should consider obtaining independent advice before making any financial decision. No responsibility is accepted for any loss arising (including due to negligence) from anyone acting, or refraining from acting as a result of this material.
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