FDIC-insured bets on China?

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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.