chinese interest rates

[brendonvdh]

Hi

Please can someone explain to me what deal is with the chinese interest rate:
Oanda quotes
CURRENCY BID ASK DATE
CNY -5.5000 -4.5000 Sat Jan 19 05:05:03 2008

erm so what is going on here?
I never realised that some countries had a negative interest rate... Does it mean you would get paid interest to borrow and charged interest if you invest with a local chinese bank? That doesn't make sense to me.

Also, looking at the USD/CNY on a daily chart there is a consistent downtrend for the last ten months.. is this basically in line with the interest rate differential. They still have a positive inflation.. I am not really understanding the bigger picture here..

Please help

[Pipcrawler]

The Chinese Renminbi (CNY) is a pegged currency and does not freely trade in the open market. Without going into too much fundamentals, the Chinese have kept the value of their currency artificially low. Due to pressures from some of its trading partners, like the U.S., they have slowly brought the value of their currency up which is why you see the steady decline of USD/CNY.

The interest rate in China is 7.47% and 3% in the U.S., so going short USD/CNY should give you positive 4.47% carry. But, brokers can basically set the interest rates they pay their clients, and I don't know the specific reason why, but my guess is they skew interest rates to protect themselves and their profit.

Imagine if a broker paid on real interest rates on USD/CNY, and all of their clients shorted huge...on 50 times leverage???? 200 times leverage?? With that kind of leverage, that would make the steady revaluation of CNY the trade of the century and brokers would get killed paying the interest on the carry.

Again, this is just my guess but the point is most brokers debit/credit what they want on carry and if carry is an important part of your strategy, you should definitely check out broker carry rates before you sign up with them.

I hope this helps

[brendonvdh]

Hi Pipcrawler

Very interesting indeed, thanks for the answer, it is a little clearer now

Is it only the brokers that are charging this interest on CNY? Surely everyone would find other ways to bypass this and benefit from the current situation if they could.

Regards broker interest rates - do you know if there is a decent comparrison somewhere of different brokes intrest rates?

Thanks again.
Brendon

[triphop]

Very enlightening.

Brendon, you asked
Is it only the brokers that are charging this interest on CNY?

As far as I could find, it was the only broker offering to trade CNY... let us know if you find any others

[brendonvdh]

Hi triphop

What I mean is that a forex broker is not the only option for investing in CNY. I am just looking at the bigger picture here.

You could literaly invest in a chinese bond or something similar to take advantage of the situation. (actually send the money)

What's stopping me from walking to my local bank and wiring money into a CNY bond? Not that I would do that but why wouldn't a large investor? It's like a carry trade but you are also banking on the steady revaluation of the CNY. The CNY has gained over 10% in the last year to the the USD plus you would gain the local interest.

cheers
Brendon

[triphop]

Ah, I see.

The only downer is that you miss out on the leverage you'd get by trading forex, so your returns are limited to a maximum of 17% annual (assuming another 10% increase in value)

But that's not to be sniffed at. Anyone else know if this is feasible?

[Pipcrawler]

I don't know of any place that compares interest differentials for brokers, but that looks like something we should do on BabyPips.com...I'll check that out!