Convert USD to RMB – What You Need to Know Before Converting Your Foreign Currency to RMB

Over the past few years we have experienced the RMB appreciate against the USD by just over 20% (Jan. 1, 2004 – February 20, 2010 source Xe.com). When China announced that it would allow the RMB to float, investors rushed to convert RMB to USD as quickly as they could because they knew that if they held on long enough, they were guaranteed to see a sizable gain from this currency play. It wasn’t rocket science that the RMB was going to appreciate as quickly as it did.

With the United States, UK, and Europe all pressuring China to release to RMB, we knew that it was just a matter of time before China decided to slowly let the RMB appreciate against these major currencies. At that time banks were allowing foreigners to easily convert USD to RMB up to a limit of $50,000 per year. Investors who were advised to invest in a currency denominated fund other then RMB looked at their financial advisors like they were crazy and could you blame them?

Anyone who was paid in RMB and invested into a USD portfolio would have had to see a 20% gain (4.4% year) just to break even due to how much the RMB appreciated against the USD during that four and a half period. But come July 2008 the party had ended, and the RMB failed to move from its 6.85 mark since July 2008 causing investors to rethink their strategy.

Investors now holding enough RMB to wall paper their house, we’re probably wondering how the heck they were going to convert their RMB back to USD. One way was to simply go to the bank and convert RMB to USD right? Wrong! For those who are unaware of the very strict currency policies in China, as a foreigner you are only allowed to convert up to $50,000 equivalent back to a foreign currency which means that if you are holding on to much more then this amount, you may be leaving China without your hard earned money.

So for investors who only had $50,000 RMB equivalent simply went to the bank to convert their RMB to USD right? Wrong again! It isn’t simple at all, and the amount of paperwork and time that you are going to spend at the bank attempting to do convect RMB to USD will be more traumatic then just leaving the money behind. The reason for this is because you can only transfer what you have paid tax on, and you will need to show proof of this from either your employee pay slips or from your government issued tax returns. Remember how easy it was for you to transfer your foreign currency to RMB?

No tax slips, no proof of income, as a matter of fact, the Chinese banks didn’t care where you got the money. Converting RMB back to USD on the other hand proved to be far more complicated. Providing proof of income posses quite a problem for many expatriates in China due to the fact that they only get paid a certain amount in RMB as the rest is paid offshore or back in their home country as a means to save on their taxes. Let’s imagine that you are paid “$30,000″ in China and your “bonus” is paid to you in your home country.

Over the last four years, you would have converted $50,000 (annual limited) to RMB and would now have $200,000 RMB equivalent. Four years later, you now want to convert the entire amount back to USD in order to realize your 20% gain, but can only convert what you paid taxes on which in your case is $30,000. This means that it is going to take you 6.6 years to convert the entire amount back to USD. Taking 6.6 years to sell an investment isn’t really Any one’s idea of a sensible investment.

If you are in a similar situation where you have converted a good amount of USD to RMB, think twice before converting anymore, and make sure you clearly understand what the implications of converting back are. The reason for these strict guidelines is because the RMB is still not a publicly traded currency, and until the Chinese government decides to float the RMB. they are going to have to carefully control the amount of foreign exchange that is traded on a yearly basis.

Although many experts agree that the RMB is still undervalued anywhere from 25-40 percent, we do not anticipate China allowing the RMB to continue to appreciate anytime soon according to an article from the New York Times on Feb. 5, 2010 (see next paragraph). After all, China has done a great job stabilizing their economy during this current global recession and they’re not about to take on any unnecessary risks that may jeopardize this.

(BEIJING – A senior Chinese official said on Thursday [Jan. 31] that China would not bow to pressure from the United States to revalue its currency, which President Obama says is kept at an artificially low level to give China an unfair advantage in selling its exports… Judging from the international balance of payments and the currency market’s supply and demand, the value of the renminbi is getting to a reasonable and balanced level,” Mr. Ma said on Thursday. – New York Times February 4, 2010)

There are many firms in Shanghai, China who have advised investors on how to take advantage of China’s growth without investing in RMB. There are legal ways to convert your RMB back to a foreign currency on a monthly basis without going through the hassles of a bank, but this method requires you to have an RMB bank account pinned to a multi-currency credit card.

Investors who use their multi-currency credit card to fund their investments have found a great deal of success when converting their RMB back to a foreign currency. Without the use of a local bank or a credit card attached to an RMB account, there really isn’t any other legal way to go about exchanging foreign currency back to RMB, and investors are strongly urged to always follow the Chinese banking guidelines when converting foreign currency in China.

Even when China does allow the RMB to appreciate against the USD again, investors should still be aware of the fact that they may only see a 20% gain over the next few years. You need to ask yourself if it is worth tying up all of your capital in an RMB account for a 20% unrealized gain? Remember, profit is only realized when you sell, and if it’s hard to sell when it’s time to do so, you are going to have a very difficult time realizing your profits. It’s always safer to invest in currencies or equities traded on the secondary markets that can be liquidated within minutes. Investing in markets that have no secondary market can take weeks to months or even years in our above example to sell out and realize a gain.

So why would you convert foreign currency to RMB if it’s such a headache to convert back? For investors who wish to buy property or other assets in China can only do so with RMB, and in the case of purchasing property the government has allowed investors to convert the entire amount required for the purchase of the property. There are a few other cases where you can convert much more then the allowed $50,000 equivalent and your local bank will be able to explain exactly what these circumstances are.

Matthew Clark
Chief Operating Officer
Elite Investment Group
http://www.elite-ig.com
Shanghai, China

Article Source: http://EzineArticles.com/?expert=Matthew_V_Clark



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