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FDIC-insured bets on China?

By Claes Bell ·
Monday, February 14, 2011
Posted: 5 pm ET

There's been a lot of talk lately about the Bank of China's decision a while back to begin accepting deposits from American consumers for conversion into Chinese yuan. The deposits are insured by the Federal Deposit Insurance Corp., and because many consider China a lock for tremendous growth going forward and its currency has long been artificially devalued by its government, many bloggers, including Felix Salmon of Reuters, whom I highly recommend, seem to think it's a pretty good idea:

On the face of it, the trade is a reasonably attractive one. The Secretary of the Treasury is still complaining loudly that the yuan is undervalued, which means that when you buy it at the current exchange rate, you're getting a bargain. A Chinese revaluation is going to happen at some point, and when it does, you'll make money.

On top of that, there's a simple diversification benefit. The dollar is still the main global currency, but there's no harm in putting a few eggs in various different baskets just in case.

Salmon goes on to say that any return will likely beat the dismal CD rates American savers have been experiencing lately:

The news of the existence of this bank account is only spreading now, but in fact it has been available for the best part of a year already, over which period a saver would have done pretty well, in dollar terms. My feeling is that nothing has really changed, and that if the yuan appreciates by say 6 percent this year, that’s still a much better return than you’ll get on any dollar CD.

I think Salmon has a point that putting money into a Bank of China account might be a good investment, given current global realities and the fact that returns on money market funds and other types of savings accounts are so abysmally low.

What I would worry about is that we're comparing apples to oranges here. It may get you a crummy yield right now, but an FDIC-insured CD denominated in dollars is a world away from an FDIC-insured account denominated in a foreign currency, which carries a significant risk not present in a garden-variety certificate of deposit: currency risk.

For example, say you've put $5,000 in a yuan-denominated account at the Bank of China. Suddenly, there's an Egypt-style uprising in China, and the value of the renminbi plunges because of concerns about the country's future. If you go to withdraw your money and only get back $2,500, you can't go to the FDIC to get the rest back. That's because FDIC insurance covers risk stemming from your bank going out of business, not risk stemming from a bad bet on currency values.

It remains to be seen whether yuan-denominated accounts will take off, and I have no problem with people engaging in currency speculation with their own money, but let's not get confused by that FDIC guarantee. Currency speculation can be incredibly lucrative (just ask George Soros), but it can also be incredibly risky. Savers searching for higher yields may want to steer clear.

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Claes Bell
February 16, 2011 at 10:24 am

Hugh, my post wasn't about the risk of investing in Chinese currency per se, but just the risk of currency speculation in general. I have my doubts about the long-term stability of China's system of government, and I worry about that mostly because it's so entwined with its economy, which we in turn depend on as a trading partner. But you have to keep in mind it's in the throes of industrialization, which is, as it was in the U.S., a messy, even deadly process. You're talking about over a billion people who were living in essentially a pre-industrial, 18th century economy/standard of living just 50 years ago. They can and should try to improve the standard of living of their people, and there's going to be some growing pains attached to that we're not going to like. Jules, I feel your pain. It's hard to see the way forward for America right now, but people have been predicting the decline of America almost since its founding.

Jules Gilbert
February 16, 2011 at 7:56 am

China is only a threat because we, as a nation, as a culture, as an empire, are failing.

Long before other nations have failed militarily, they have first failed cultureally.

America used to be a Christian nation, now the best description of our country is that we are a post-Christian society.

Look at Britain, I understand that petty crime has reached such a level that police issue tickets to appear in court for the crime of breaking into someone's home, they don't arrest the perpetrator (which must give great comfort to the victim!)

And yes, today crime is down in the US, true enough. But so far we've been lagging England by about 20 years...

Oh yes, most economonists see England as being in a permanent recession. Hello, America?

Hugh Campbell
February 15, 2011 at 8:50 pm

With, one of the leading authorities on China, Peter W. Navarro’s latest book, Death by China: Confronting the Dragon - A Global Call to Action being released in May 2011 what is the risk/reward trade-off to the FDIC to insure yuan-denominated accounts. What if Bank of China’s another Enron?

Death by China: Confronting the Dragon - A Global Call to Action, Amazon’s description follows: China is now the #1 danger facing America. Best-selling author and economist Peter Navarro exposes every form of "death by China"—from lethal products to espionage, imperialism, and nuclear proliferation through China's relentless attack on the U.S. economy.