# The Chinese Yuan’s Anticipated Rise – Investment Implications (Part 1)

Expected Chinese yuan improvement could provide us with an investment opportunity. However, before going there, I thought a review of challenging exchange rate math would help ensure full understanding.

To start, if I said I just bought gasoline for $3.00 a gallon, you’d know exactly what I meant. And if you saw that gas had risen from $3.00 to $3.30, you’d know that there had been a 10% increase. These pricing and percentage change conventions are ingrained into our everyday thinking. Now let’s enter the currency exchange world…

A recent Bloomberg article described the possible move in the Chinese yuan’s exchange rate. The report said that the markets expected the yuan, now at 6.8269, would rise about 3% in a year – to 6.6285. “WHAT?” you might reasonably exclaim. A quick check on the calculator shows that a move from 6.8269 to 6.6285 is a 2.9% *decline*. Did Bloomberg blow the calculation? Unfortunately, no.

First off, notice that those numbers do not have a dollar sign in front of them. That’s because the exchange rate for the yuan is quoted in yuan, not dollars. Thus, 6.8269 means *yuan per dollar*. In my gasoline example, it would be like me saying I bought gas at .333 (gallons per dollar). And that 10% increase would be a 9% decline to .303.

This means that, to make understanding easier, we must convert such numbers. Fortunately, doing so is easy. To convert from gallons-per-dollar to dollars-per-gallon, we just need the reciprocal (i.e., dividing into 1). Thus, dividing 1.00 by 0.333 (gallons/dollar) gives us $3.00 (dollars/gallon).

Using that math, let’s convert those yuan exchange rates to prices we can use. First, divide 1 dollar by 6.8269 yuan and we get $0.14648 dollars/yuan. Likewise, 6.6285 becomes $0.15086. Now, let’s reword Bloomberg’s message with our new, understandable numbers:

The markets expect the yuan to rise from $0.14648 to $0.15086, an increase of about 3%. Ah, now it makes sense. And now we can see the beginning of an investment opportunity, perhaps: buy something valued in yuan.

**Why isn’t the yuan exchange rate quoted in dollars?**

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This question is especially relevant when we see that exchange rates flip-flop. The Japanese yen, similar to the yuan, is quoted in yen/dollar (about 90) – likewise for many other world currencies. However, the British pound and European euro are priced in dollars – about $1.50 per pound and $1.35 per euro.

The answer is in the numbers. Note that each exchange rate is greater than one. It’s simply easier to deal with the larger numbers. Japan is a good example. Converting an exchange rate of 90 yen/dollar into dollars/yen gives us an exchange rate of slightly over one penny ($0.0111). Way too many decimals are needed to work with such low rates.

This convention is accepted because exchange rates involve two currencies – meaning one currency holder “wins” and the other “loses”. For example, the British, who are accustomed to prices expressed in pounds, would prefer the US dollar exchange rate in* *pounds per dollar. So, in this case, we win.

With this understanding, and a trusty calculator, we can now evaluate what the Chinese yuan’s expected rise might mean to us investors. More tomorrow…