Join John Adams, world renowned Intl Matchmaker, Monday nights 8:30 EST for Live Webcasts!
And check out Five Reasons why you should attend a FREE AFA Seminar!
View Active Topics View Your Posts Latest 100 Topics Mobile Theme Dark Theme
Discuss issues related to business, finance, taxes, investments, cost of living in different countries, etc.
8 posts • Page 1 of 1
A couple weeks ago, I spent 5 days in Shekou, a part of Shenzhen China, to open a Chinese Yuan or Renminbi (RMB) bank account and make some local currency financial investments.
1. US$ has been losing value overseas under US monetary policy for most of the last decade. Fed compromising dollar in order to reduce effective foreign debt burden, stimulate exports, and create the illusion of robust equity markets. Recent quantitative easing policy is effectively a stock dividend â€“ printing new shares with no change in capital. Implementation of this policy in the coming months will put more downward pressure on buck if Fed follows through.
2. Diversification out of US$ is an increasingly necessary risk reduction measure, especially for those who live abroad or plan to so in future. Effective US$ cost of living in many areas of the world has increased 50-100% or more in last 10 years, due in large part to US$ depreciation vis-Ã -vis other fiat currencies.
3. US$ interest rates are near all time lows for all durations of fixed income instruments â€“ both public and private. Most of these investments donâ€™t even keep pace with the true rate of inflation. Current risk premium is low as well making so-called â€˜high yieldâ€™ bonds not very â€˜high yieldâ€™. There are still a few currencies which offer higher yields at reasonable risk through certain domestic fixed income instruments. The Chinese Yuan is one of these.
4. The Chinese Yuan is still a government controlled currency and as such, has lagged many other foreign currencies including some in Asia. Since July 21, 2005 when PRC government began implementing currency reform (ie moving gradually away from US$ peg), Chinese Yuan has appreciated just 25% against US$ vs. 68% for Thai Baht, 64% for Japanese Yen, and 47% for Brazilian Real. Since China is an export dominated economy, depressing local currencyâ€™s rate of exchange has worked in its favor. But given the large PPP gap this has created between China and North America/EU/Japan, there is increasing political pressure for it to allow for more rapid appreciation of RMB or risk a trade war. The IMF estimated that, by PPP, one US$ was equivalent to just RMB3.8 back in 2008. The current rate of exchange is 6.64.
5. As a â€˜managed currencyâ€™, Chinese Yuan exchange rate to US$ exhibits low volatility compared to free market currencies. Moreover, there has been a clear secular appreciation trend since 2005 liberalization which was only interrupted during 2008-09 financial crisis when US$ index quickly gained value on top of leveraged investment unwinding. Even during that period, RMB did not lose any ground. It just temporarily stopped appreciating.
1. If another global financial crisis materializes, there would likely be short term upward pressure on US$ index as many foreign levered investments using US$ for financing would be quickly re-deemed and converted to cash. From July 2008 low to March 2009 high, this index jumped 24% on such de-leveraging. However, RMB was one of the few currencies not to decline against US$ during that period as mentioned above. I believe its status as a controlled currency helps to mitigate this risk.
2. Since RMB is not a freely traded currency, it is effectively less liquid than something you trade in online FX account. Moving in and out of it is more cumbersome and requires higher transaction and time costs. This makes it unsuitable as a short term investment.
3. A few months before Beijing Olympics, relevant banking and finance rules for foreigners were relaxed somewhat to accommodate a big influx of tourists and have not been changed since. Going forward, Chinese government might change regulations again to the detriment of foreign account holders, especially if its relations with US sour or a trade war ensues.
4. Since inward and outward remittances overseas require physical presence of owner, an account holder would have a problem if he was for some reason unable to obtain a China visa. However, this risk is largely mitigated by the Union Pay system which allows daily withdrawals up an equivalent of RMB 10,000 per day at competitive exchange rates and at a fee of just RMB 15 per transactions at participating overseas ATMs.
5. If an account holder is married to a Chinese citizen and later divorces her, she could easily discover the existence of the account and possibly claim ownership of half according to Chinese divorce laws. The best way to mitigate this risk is to close account and transfer funds overseas before getting married to a local.
6. If a person dies while holding such an account, his heirs would probably need to visit China and hire a local lawyer to take over ownership of the account.
1. Opening a Chinese commercial bank account requires you show-up personally, similar to private banks in Switzerland and Andorra. You will need to bring and show your passport. Your bank account will be multi-currency including RMB and most leading globally traded currencies. This will allow you to wire-in and directly deposit currencies such as US$, Euro, or Japanese Yen.
2. Converting your foreign currency deposit into RMB also requires your physical presence. So after you open the account, you will need to fax wiring instructions to your foreign financial institution and wait for funds to arrive. The government limits foreigners to US$50,000 worth of aggregate Chinese Yuan purchases per calendar year at commercial banks. FX transactions made by foreigners are instantly uploaded into a centralized national database so using multiple banks will not get around this. But the regulation can be easily bypassed for amounts above US$50,000, at a slightly higher transaction cost, by using official foreign exchange bureaus (外币代兑点) or (FXB). These are actually subsidiaries of the commercial banks but fall under different rules. So, for example, if you remitted in US$60,000, you could convert US$50,000 into RMB directly at the bank, wire the remaining US$10,000 to a nearby FXB, convert to RMB, and wire it right back to your bank account.
3. Eventually, you may want to convert your RMB funds back to US$ and repatriate them to your home country. At Chinese commercial banks, such conversions for foreigners are restricted as follows:
a. If you convert your US$ balance directly to RMB, you will not be allowed to convert back at the bank. You will need to wire the funds to an FXB, have them make the conversion, and then have them wire the funds to your overseas financial institution.
b. If you withdraw your US$ balance in cash (up to US$10,000 per day allowed), pay a foreign cash withdrawal fee of 0.4%, convert cash to RMB at bank, and then deposit funds back into your account, you will be given 24 month FX receipts for each of these transactions. These receipts will allow you to convert your funds back to US$ directly at bank until the 24 month period expires. The most you will be allowed to convert to RMB directly at bank is US$50,000 equivalent value per calendar year as mentioned above. This is probably the most expensive way to go.
c. Since you will be issued a Union Pay ATM card, you can also withdraw up to RMB10,000 per day (roughly US$1,500) at participating overseas ATMs at attractive exchange rates and a local fee of just 15 RMB per transaction. For ATMs with no extra fees, like the ones in Taiwan, this is probably the cheapest way to go.
4. Summary of account opening and investment steps
a. Show-up at bank during business hours with passport and if you donâ€™t speak Mandarin, a translator.
b. Take a number and wait to be called.
c. Fill-in required forms, let them copy your passport, and deposit at least the minimum (10 RMB) in cash.
d. Receive ATM card and for some banks, a passbook.
e. Speak with someone about how to use online banking system.
f. Ask for a copy of inward wiring instructions.
g. In the evening, fax instructions to your overseas bank or broker to remit US$ funds into account.
h. Check next day at bank to see if funds have arrived. Transfer usually arrives overnight from US.
i. Convert up to US$50,000 directly to RMB.
j. Speak to personal banker about available CDs and other products, choose, and invest.
Direct round trip transaction costs using FXB to convert back to US$ as per 3a above
1. Fee to wire transfer US$50,000 from Charles Schwab to bank is US$25.
2. After exchanging US$49,975 to RMB, fee to wire these funds from bank to FXB is 20.5 RMB.
3. Effective Bid/Ask spread 1.4% using FXB to convert back to US$.
4. Wire transfer fee from FXB back to Charles Schwab is 180 RMB.
5. Total round trip cost is US$743 or 1.49%.
Direct round trip transaction costs using no-fee ATM to convert back to US$ as per 3c above
1. Fee to wire transfer US$50,000 from Charles Schwab to bank is US$25.
2. If we conservatively estimate that funds will be withdrawn via 50 ATM transactions, fee is 750 RMB (50 X 15).
3. Effective Bid/Ask spread varies but is approximately 0.2 â€“ 0.4%. using ATM to convert back to US$.
4. Total round trip cost is US$237 â€“ 337 or 0.47 â€“ 0.67%.
List of PRC Banks
See this Wikipedia link for a fairly recent list with sub-links for each institution: http://en.wikipedia.org/wiki/List_of_ba ... c_of_China
Initially, I chose Bank of China given its comprehensive (urban/suburban/rural) branch network throughout China and convenient location in Shekou. But I switched over to Bank of Communications next door when I discovered it offered a more attractive investment product.
How to invest your RMB
As a foreigner, you are not permitted to invest in 3rd party domestic funds offered at the banks. But you may invest in CDs or bank sponsored products.
1. Current demand and CD annualized simple interest rates offered at all PRC banks. There are no entry or exit fees for these investments
a. Demand: 0.36%
b. 3 M: 1.91%
c. 6 M: 2.2%
d. 1 Y: 2.5%
e. 2 Y: 3.25%
f. 3 Y: 3.85%
g. 5 Y: 4.2%
2. Jiu Jiu Tian Li (久久添利) product offered by Bank of Communications pays a monthly cash dividend based on investment performance. The fund invests primarily in the local bond markets but also a bit in local equities and construction. Most importantly, it guarantees a monthly cash dividend of at least 1.75% annualized. Performance to date has been much better than that. Below is its track record of annualized dividend payments through last month which yields a cumulative average growth rate (CAGR) so far of 6.1%, much better than any of the CDs. However, momentum has declined as of late on the back of a weak domestic equity market. Keep in mind that this bank is owned by the central government and guarantees a monthly annualized cash yield of at least 1.75%.
The entry cost to get into the fund is 2% and exit cost is 2% if held less than a year, 1.5% if held 1-2 years, 1% if held 2-5 years, and 0 if held over 5 years. Given this fee structure, you probably should not invest unless you plan to hold it at least 2 years.
The way to get around all PRC regulations are to do the following:
1) Go to any large city and use the black market currency exchanges that exist either in the bank lobby or nearby. No need to show passport as at the airport.
2) Take a sleeper bus to Hong Kong. You don't even need to show ID to take these. Just hop from one to the next.
3) Walk across the border (a non-event just like the USA-MEX foot crossing in San Diego/San Ysidro).
4) Go to your HK bank branch of your USA bank, deposit the currency.
Remember that even during WWII, many Germans and Jews moved their wealth out of harms way. You just have to think ahead, plan, and not be left unawares when events spiral.
Not wise, especially for amounts like US$50,000 or above
1. Carrying large amounts of cash anywhere is risky. Counter parties involved in the transaction may inform friends and you could be targeted for robbery. I wouldn't even carry that much on me in central Singapore, one of the safest places in the world. And theft does happen frequently at the HK/China land borders too.
2. Last time I took one of those buses from Guangzhou, some of us had our bags screened when walking into HK. Random checks in more detail happen sometimes as well. If you get caught transporting a significant sum (usually over US$10,000 or its equivalent) across most national borders, confiscation is usually unavoidable and you may face additional penalties and/or a prison sentence. I remember a few years ago when I was in Brazil, some American idiot with about US$40,000 of cash stashed in his suitcase somehow got caught at GIG airport. The cash was confiscated, and he was given a choice by the federal police - pay an additional US$250,000 fine or spend five years in a Brazilian prison. And speaking of Mexico, an American, Martin Thomas Arnold, had over 5 kilos of gold coins confiscated there by police earlier this year just because he got discovered with them at an international airport (a quasi border). He was also arrested.
3. Unless your involved in tax evasion or money laundering, what's the point in taking on the risks involved in 1 and 2 above if official channels provide a cheap, easy, and safe way to remit your funds to the bank and country of your choice?
Well then, your suggestion entails breaking serious laws in 2 of the worldâ€™s most powerful countries:
1. Smuggling money across the China/HK border.
2. Failing to disclose your China and/or HK bank accounts to US Treasury (you donâ€™t want anyone to know where your money came from or where it went, right?)
3. Failing to report interest income, dividends and capital gains generated from these accounts on your US tax returns
Assuming you donâ€™t get robbed in China or caught at the border on either side, you still will have a lot to worry about after you deposit the funds into the HK branch of your US bank.
Since itâ€™s a US bank youâ€™re dealing with, the red flag you may raise if you just show-up and plunk down a pile of cash at a teller window will likely get reported back to the relevant department in the States and may be investigated as a suspicious transaction. US banks are required by law to follow such protocols.
Even if you were dealing with a domestic HK bank or other non-US bank, the jurisdiction of HK does not provide true bank secrecy. Both HK and China have tax treaties in force with the US. You can be pretty sure that they would provide account data of a US citizen to IRS or US Treasury if requested to do so. Just look what happened to Switzerland last year.
The US IRS has full time expat teams stationed in Beijing and HK. Even if you fell through the cracks and didnâ€™t get audited until several years later, the bank paper trail you left and your failure to disclose and file would expose you to draconian civil penalties and criminal charges. And once you leave US soil, the statute of limitations on all financial and tax crimes freezes.
If you really think hiding a relatively modest sum of money (a few hundred thousand US$ at most) is worth all that risk, then go right ahead.
Momopi, you already posted a link to this bank back in November 3. And I responded ( viewtopic.php?t=4305&start=20 ) explaining why its not the best option for foreign currency investments.
IMO, Everbank is for suckers. The spreads and CD rates are very unattractive relative to a forex account via Saxo or Interactive (if you can accept the latter's very user unfriendly platform). I think the only thing Everbank offers that can't be duplicated with the above mentioned brokers is RMB exposure. But Everbank"s RMB account pays no interest and has a nasty bid/ask spread. The bank is Florida based and has terrible service too.
The better way to invest in RMB is to go to a bank in China, open an account, and wire the money over (up to $50,000 direct per year but there are easy ways around this limitation if you want more exposure), and convert it to RMB. Once you have your RMB account, you can buy fixed rate CDs (1.9 - 4.2% annual interest depending on term) and your bid/ask spread will be very attractive. Also, the smallest of the 5 government banks also offers a low risk product which pays up to 6-8% with capital protection and minimum annualized rate of 1.2% guaranteed for each quarter. Since inception some 16 months ago, it has averaged about 5% with 3.6% on its wost month.
Moreover, there are a couple of international RMB funds being launched now which will available for subscription by the end of this year. They won't be quite as lucrative as having a direct account at a Chinese bank but they will be a lot better than Everbank's product. With the fund, at least you will get around 2% interest and the bid/ask spread will be reasonable.
Bank of China in States 2 NYC branches and 1 LA branch recently began allowing non-Chinese to open Chinese Yuan (RMB) accounts for the first time. But the annual maximum deposit is just US$20,000 worth and I don't think these accounts pay any interest or investment returns and are much more restricted. You just sit on dead money. Don't know about spreads and other details yet.
Wall St. Journal articles:
http://online.wsj.com/article/SB1000142 ... bs=article
http://online.wsj.com/article/SB1000142 ... 93532.html
Bank of China NYC Branch RMB Deposit info page: