Xiao Lei: Don't panic, four ways to deal with the depreciation of the RMB, Bitcoin is one of them

The RMB exchange rate fell below 6.86 both onshore and offshore. Although the market has expected the fluctuation of the RMB exchange rate, it is not very calm. Since the beginning of 2014, the RMB exchange rate against the US dollar has fallen by 14%, and has now returned to the time when the exchange rate reform was restarted in 2010 (the exchange rate reform was basically stopped after the 2008 financial crisis until May 2010). This also means that since the exchange rate reform was launched in 2005, the RMB has completely gotten rid of the expectation of unilateral appreciation.

Onshore RMB exchange rate against the US dollar

In addition to the slowdown in China's economic growth, the narrowing of the interest rate gap between the RMB and the US dollar, the return of global capital to the United States, and the continuous reduction of China's foreign exchange reserves, the accelerated depreciation of the RMB exchange rate in recent days is mainly due to the rekindled demand for US dollar safe havens caused by the US election. The US dollar index once again broke through the 100 mark, reaching the level before the Fed started to raise interest rates at the end of last year. The global financial market is more volatile, and the pressure on the RMB exchange rate is not much different from the adjustment of the international commodity market and the fluctuations of other non-US currencies. They are all shocks caused by the strengthening of the US dollar.

In the past two years, although the RMB exchange rate has continued to decline, there has actually been no strengthening of control at the policy level. During this period, many investors have completed the layout of overseas assets, including currency exchange, purchase of overseas insurance, allocation of overseas real estate and funds, holding securities denominated in foreign currencies, etc. However, in this process, some investors did not obtain better investment returns. On the contrary, due to the herd effect, some investors blindly exchanged currencies. In the process of purchasing overseas assets, they lacked professional guidance, and were often cheated and deceived.

Recently, the policy level has begun to strengthen monitoring, and many people's centralized currency exchange and group purchase of "overseas" insurance have begun to be restricted. In the future, investors need to enter existing and planned investment channels such as "Shanghai-Hong Kong Stock Connect", "Shenzhen-Hong Kong Stock Connect", and "Shanghai-London Stock Connect"; in particular, the demand for QDII (Qualified Domestic Institutional Investors) will continue to increase, but currently the products and quotas are limited. Insurance QDII, fund QDII, and bank QDII all have ceilings to varying degrees. Investors need to find other ways out in the domestic asset market.

Although investment and financial management is a professional job, the more complicated it is, the more uncontrollable the risk is. Simply put, the depreciation of the RMB has two effects: one is that prices will rise, and the other is that cash assets will shrink. Under the current conditions, how should Chinese investors deal with the depreciation of the RMB?

1. Pre-consumption and debt-based consumption

This advance consumption is not just for imported products. China's inflation index has begun to rise, and a new round of price increases for many domestic commodities may be inevitable, but the magnitude is difficult to predict. For consumers, the continued decline in interest rates has reduced the cost of debt. Things originally planned to be purchased next year can be purchased this year; those who originally planned to travel/study/visit relatives abroad next year can go this year first; all consumption and overseas travel plans can be appropriately advanced.

Of course, this price increase trend cannot cover every commodity. The price increase of branded products may be higher. For example, high-end liquor has already started to increase in price. In particular, once many luxury brands adjust their prices, it is difficult to return to the original level. If you buy some mid-to-high-end luxury goods, you may be able to achieve the effect of maintaining and increasing their value.

2. Hold multiple foreign currencies, including Bitcoin

The depreciation of the RMB against the US dollar does not mean that the US dollar will appreciate against other currencies, nor does it mean that the US dollar will continue to strengthen. During the last Republican administration in the United States (the Bush administration), the US dollar fell for nearly 8 consecutive years; many domestic investors have not experienced the big bear market of the US dollar, and always think that holding US dollars is better than RMB. This is a very dangerous perception, so more comprehensive risk management is needed.

Exchange rate trends in the first ten months of this year

Since the beginning of this year, the Japanese yen, Canadian dollar, Swiss franc, Australian dollar and other currencies have appreciated against the US dollar. Holding a variety of foreign currencies, or buying more types of foreign currency assets, in itself forms a risk hedge, so that you will not be at a loss when the US dollar experiences a pullback.

The predictability of the foreign exchange market is the lowest, because governments of various countries intervene from time to time, so improving risk management awareness is the most critical. In fact, according to some historical data of the international market, more than 80% of the profits of successful investors come from strategies and risk management, rather than simply judging trends. The level of investors' awareness of their own investment capabilities is actually more important than the risks of the market itself.

In addition, many Chinese investors have a strong appetite for risk (a strong gambling nature), and they can actually invest in some electronic currencies, such as assets like Bitcoin. Hedging against the depreciation of the RMB is one aspect, but more importantly, they can expect a "surprise." Remember not to invest too much money.

3. Buy index funds

More than five months ago, I wrote an analysis titled "There is indeed an investment portfolio with close to zero risk", in which I recommended that investors buy both the CSI 300 Index Fund and gold at the same time (the two can complement each other's advantages and hedge risks). At that time, the CSI 300 Index was only 3040 points, and it is currently 3430 points, up 13%.

Many investors are resistant to the Chinese stock market, but in the long run, China has a strong consumer base, and the profits and value brought by these consumption will eventually be shared by more large companies. You may not be able to pick stocks or understand the cycle, but some indexes that absorb the best listed companies in China will definitely rise in the long run. The returns from buying index funds will not be amazing, but their expected returns are better than those of fixed income markets such as money funds and bonds, and it is also a high probability event to outperform the depreciation rate of the RMB.

4. Holding Gold

The recent sharp drop in gold prices has impacted investors' confidence. In fact, compared with the volatility of risky assets, the volatility of gold prices is completely affordable for ordinary investors. The daily fluctuation of gold prices exceeds 5% in less than 1%. In the past decade, gold has given long-term investors a nearly perfect answer with its excellent performance. In the past 15 years, the gold price denominated in RMB has increased at an average annual rate of 10%. Except for 2008, 2013 and 2015, the rise in gold prices has hardly encountered much resistance.

Gold price increase in RMB over the past 15 years

Gold has financial and monetary attributes, and its supply is naturally limited. Its price will be adjusted within a certain period, but in history, no sovereign credit currency has a purchasing power comparable to gold. The U.S. dollar, as the world's most competitive international reserve currency, has depreciated more than 30 times against gold over the past 40 years. Holding some gold assets denominated in RMB is a safer option in dealing with RMB exchange rate fluctuations.

Conclusion:

From a longer-term perspective, the total wealth and investment awareness of the Chinese people are gradually increasing, and the assets they hold should be expanded to the global market. Japan is currently the world's largest holder of overseas assets. The main reason is that Japan relaxed its restrictions on overseas investment. During the more than 20 years of domestic economic stagnation, the growth of overseas wealth offset the decline in domestic asset returns. The stability and security of the wealth of the Japanese people are actually higher, which in turn provides a very good foundation and guarantee for Japan's traditional manufacturing, medical services, scientific research, etc. This is worth learning from China today.