Thank you for joining this Forex Academy educational video. In this session, we will be looking at for little events surrounding the ratcheting up of tensions between the United States and China. Donald Trump has now signed an executive order banning the use of TikTok, a sort video platform owned by Bytedance Ltd. The order will come into effect within 6-weeks of the time of writing this article. This is almost unprecedented where such apps could be banned from use to millions of us citizens. United States citizens and American companies will be banned from doing business with either of these two firms.

The idea being that Microsoft would be the only company to collate user information, stating that this would be safe Microsoft and not passed onto the Chinese government. Tiktok, which was seen until fairly recently as a harmless video for children, has been embraced by celebrities and influencers, which has helped it attain exponential growth within the United States. However, US national security concerns that its parent company will share valuable information with the Chinese government, and the same can be said for WeChat.

While the digital market remains open in most western countries, including the United States, where are companies such as Facebook and Amazon and Google operate with few restrictions, China has blocked several US internet companies, including Google, from operating in its country. And while Tencent lost billions as the WeChat ban hit Chinese stocks and caused the Chinese Yuan to depreciate, the fallouts could hit United States tech stocks as markets try to calculate how American tech companies and other firms in the United States are affected because some of them rely on these apps for their businesses.

One thing is for sure, the escalation between these two Nations can only get worse before it gets better. As the Chinese economy becomes a more dominant player in international trade and the yuan continues to gain more acceptance, more and more investors are looking for ways to obtain exposure to the Chinese currency.

While the yuan is still somewhat pegged to the U. Investors have several yuan investment options, including purchasing yuan directly and holding it in cash, investing in funds that hold the Chinese yuan, and buying yuan futures contracts. However, there are nuances to each investment.

From to , the devaluation of the yuan by the Chinese government has accelerated from approximately 6. As the Chinese economy continues to expand, rapidly moving China from its status as the premier emerging market economy toward being the world's number one economy overall, the yuan is gaining substantially greater acceptance worldwide. Further bolstering the status of China, the International Monetary Fund IMF added the Chinese renminbi to its list of reserve currencies to be used, in part, for central bank transactions.

The Role Of The Chinese Yuan In Forex

The yuan is used to facilitate global and financial transactions and is typically used offshore—outside China—while the renminbi is more frequently used in China—onshore. Other currencies that are considered reserve currencies include the U. The elevation of the renminbi's status allows it to be used more frequently in global trade and international financial transactions. However, the Chinese government still controls the value of the yuan and renminbi exchange rates and has capital controls in place, which prevent Chinese investors from moving money out of China. Until China can freely float its currency and allow the free movement of capital investment in and out the country, it's unlikely that the yuan or renminbi will replace the U.

Reserve currencies are used to price commodities, such as gold and crude oil, as well as facilitate global trade transactions in developing countries that have less stable currency regimes and financial systems. Nevertheless, it's fair to say that the Chinese currency is on the path to becoming a larger player in international transactions. Investors must convert funds back to U. As long as they hold money in these accounts, investors benefit from any appreciation in value in the Chinese currency. They are IRA-eligible, and a monthly maintenance fee may apply.

As long as the yuan remains a non-deliverable currency, withdrawals can only be made in U. Another way to invest in the yuan is through exchange traded funds ETFs designed to perform in accordance with the value of the Chinese currency. This ETF is invested in a portfolio of dim sum bonds , which are issued outside of mainland China but are nonetheless denominated in the yuan.

The fund offers capital appreciation in accordance with the yuan, a generous dividend yield that can range from 3. Dividends are typically cash payments made to investors as a reward for investing in a security, fund, or stock. The fund also offers the potential for capital gains resulting from increased bond values.

The fund aims to mirror the performance of Chinese interest rates and the value of the yuan relative to the U. Forward contracts allow two parties to exchange two currencies by locking in the pair's exchange rate today for settlement at some point in the future. The initial forward contract is offset or unwound when its settlement date comes due. The difference in the exchange rates between the original forward and the offsetting trade is the gain or loss from the currency exchange rate movements.

The net difference is typically settled in dollars, and no yuan changes hands.

Investors wishing to maximize investment in the yuan through the use of leveraged investments may consider currency futures or forex market trading. Leveraged transactions use borrowed funds to enhance the gains or returns on an investment.

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However, just as leverage can magnify gains, it can also magnify losses. Futures options on the yuan are also available. Futures are derivatives since they derive their value from the underlying investment. Futures contracts can be used to speculate on currencies and commodities. However, futures have preset expiration dates and are standardized unlike forward contracts, which allow customized amounts and settlement dates. A limited number of forex brokers offer trading in the U. Since these types of investments are highly leveraged, they are only appropriate for investors who are willing to accept the higher level of risk that accompanies the substantially higher level of potential return.

International Monetary Fund. TIAA Bank.