The International Monetary Fund (IMF) has predicted that the Chinese Yuan will eventually replace the United States Dollar as the world’s “benchmark” currency. Should this prove to be the case, it would represent an unprecedented chance for investors worldwide to profit from what would become one of the defining moments in world economic history.
This short article will briefly explain the economic “mechanics” involved in currency trading and then introduce strategies that can help the small investor learn how to invest in Chinese currency.
In very basic terms, and if the IMF prediction holds true, the Chinese Yuan will increase (appreciate) in value compared to the US Dollar. In other words, a Chinese Yuan could be exchanged in the future for more Dollars than it can at present.
The investor can therefore purchase Chinese Yuan with US Dollars now and then wait for the Dollar to fall in value relative to the Yuan Should this occur, the investor could then sell his or her Yuan and purchase more dollars than were needed to initially buy the Yuan.
The difference in the purchase and the sale value of the Yuan represent the investor’s profit on the transaction. An effective way that such transactions can be accomplished is Foreign Exchange trading through a broker.
Foreign Exchange (FOREX) Trading
FOREX trading allows the investor to gain control of significantly larger amounts of currency by use of leverage, in which a relatively small “margin” amount can control up to 100 times as much of the currency value.
For example, a $5,000 investment could gain control of 500,000 Yuan. In this case, an increase of only 1% in the value of the Yuan could lead to a profit of 5,000 Yuan (.01 X 500,000 Yuan = 5,000 Yuan).
At an exchange rate of 6.50 Yuan per Dollar this would represent a $769 profit on the initial $5,000 investment, or a return of 15%.
Forex trading is, of course, far more complicated. To better understand its details, many Forex brokers offer free “phantom” trading accounts to help potential investors learn the technical skills that are necessary to master this exciting way for smaller investors to participate in emerging investment opportunities in foreign currencies such as the Yuan.
The small investor would be well-advised to consider currency trading as a way to profit from future changes in the world’s economic structure.
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
While living overseas, he uses PureVPN for a low cost VPN service.
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While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.