The Great China Investment Strategy

Economics, Premium POM

Appreciation of the Emerging Currency

By JC Collins

With the inclusion of the renminbi being openly discussed and accepted by mainstream media all over the world, it is worth taking a few minutes to revisit the SDR Futures investment strategy which was started here back at the beginning of May.  Media representatives in Hong Kong, and elsewhere, are starting to take notice that a fundamental change is beginning to take place regarding the renminbi, and a few have reached out to POM for more information and clarification.

Since May I have written very little on the SDRF as I didn’t want to give the impression that the purpose of POM was to get readers to invest in this specific strategy. Though readers could replicate the strategy themselves, the intent with SDRF was to address the demand from readers to know what they could do to protect their wealth and transition along with the multilateral adjustments.

At that time there was little acceptance or acknowledgement that the Chinese currency was going to be added to the SDR basket composition.  Many felt it would never happen and others thought it would be another 5 years.  There has even been speculation that the currency would be added through a sliding scale type mechanism which would see its value in the basket increase as more capital liberalization takes place.

Though that could still be the case, it is becoming extremely clear that the opportunities around the renminbi, and its importance in the financial world, are taking tremendous leaps forward.  It is this advancement which has been at the center of the SDRF investment strategy.  The SDR basket, as it stands today, does not accurately reflect the economic realities of the emerging economies.

China, and others, such as India, Indonesia, Malaysia, Vietnam, and a host of developing countries in East Asia and the Eurasian continent, are going to realize tangible GDP growth under both the AEC and TPP trade agreements.  This growth in real production will translate into an even larger share of the world economy.

The renminbi, being the only “emerging currency” which will be added to the SDR basket, will begin experiencing upward valuations against the currencies of the developed nations.  Other countries in East Asia could very well peg their own domestic currencies to the RMB and allow for the balance of payments adjustments to gradually take place in the months and years after.

There is so much happening within the international monetary framework that it is challenging for the average reader and investor to stay afloat of the changing tide.  When you add the large amount of western propaganda and misleading information which spreads like wildfire, it becomes even more important for the regular person to gain a functioning understanding while working towards a sustainable investment strategy.

The filters which have been used in the years past to understand and decipher macroeconomic trends break down when we consider the implications of the multilateral transition.  The reduction of USD foreign reserves and the diversification and substitution of those reserves with the renminbi and euro is the greatest economic event to take place in decades.  The rise of the yuan is important and should have been foretold 18 years ago when the British returned Hong Kong back to China.  The inevitable appreciation and internationalization of the RMB should have been equally as obvious to most analysts.

The announcement of the inclusion of the RMB into the SDR should be announced in November.  It is widely expected that the governing board will vote to include the yuan and from there the effective date will have to be decided.

The preliminary effective date has been pushed from January 1, 2016 (the start date of the AEC trade agreement between ASEAN countries) to sometime in October of 2016.  This delay does not mean the RMB will not be added, but simply means the IMF is giving the US another fiscal year to straighten out its domestic budgetary challenges.

How all of this relates to US interest rates and the coming depreciation of the dollar against the emerging currencies is difficult to determine.  Here on POM we have explored many potential outcomes and possibilities, all of which are based on documented macro strategies and fundamental changes to the international monetary system.

What is clear, and should remain clear in the coming months, is that the renminbi will begin to appreciate and take other emerging currencies with it.  The SDRF investment strategy, and any other investment strategy for that matter, should consider this tangible reality.  As I’ve written consistently, the USD is not dead, and is not going to completely collapse.  But it will adjust to fit within a more balances multilateral framework.  – JC