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Wealth Managers Have Yuan Signs in Their Eyes

Private banks and wealthy investors are angling for the next big currency trade: the Chinese yuan.

The long-anticipated liberalization of the Chinese currency and possible easing of China's capital controls in the coming years are creating a historic business opportunity for the multitrillion-dollar wealth-management market. In addition to allowing wealthy Chinese investors to invest their money more freely abroad, the moves are expected to open the floodgates for wealthy investors from around the world trying to bet on the possible appreciation of the Chinese currency.

China has about 1.3 million millionaires with $1.65 trillion in total wealth, according to a recent report from the Deloitte Center for Financial Services. Deloitte predicts that the total wealth of the millionaires in the world's 25 major economies could more than double over the next decade, to $202 trillion from $92 trillion. With currencies playing an increasing role in the portfolios of the wealthy, banks are jostling for a piece of the yuan investment pie.

Getting Attention
"A big part of what we're investing in globally is building our capacity to serve this market," says Aaron Gurwitz, chief investment officer for the Barclays Wealth unit of Barclays PLC. "It's definitely a market that has people's attention."

Granted, that "market" is still in its infancy. Wealthy Chinese face tight restrictions on their ability to move money outside the country. Many Chinese millionaires and billionaires use offshore accounts for non-yuan investments, according to private bankers.

The business of foreign investments in the yuan is also tightly restricted. While there is a growing number of yuan-denominated products—including "dim sum" bonds, or yuan bond issues outside China—they are in short supply. Many are also complex and poorly understood by investors.

"For the time being, the number of assets that you can buy is pretty limited and of variable quality," says Richard Cookson, chief investment officer for Citi Private Bank.

Yet rich investors around the world—especially from developed countries—are increasingly asking for yuan-based investments. Many are growing bearish about the U.S. dollar and euro because of public-debt problems, and they want to ride the faster economic growth in emerging markets like China. A recent survey by the Institute for Private Investors of investors with at least $30 million in assets showed that nearly a quarter of respondents are managing currencies or hedging their currency risk.

"We are seeing strong interest from many investors from the West as they want to invest in yuan products because they expect the yuan to appreciate," says Arjuna Mahendran, the Singapore-based head of investment strategy for HSBC Holdings PLC.

Among those competing for the business are the major Western private banks, including Citigroup Inc., J.P. Morgan Chase & Co., UBS AG and Credit Suisse Group AG, along with more Asia-centric banks like  SBC and Standard Chartered PLC.

HSBC, for instance, says it was among the first to start offering wealthy clients foreigncurrency products in the yuan market, including deliverable forwards, options, dim-sum bonds and other products. Barclay's Wealth, which is also involved in the dim-sum bond market, is building its client-research team in Asia and expanding its product offerings.

Investing by Proxy
Because the future of the currency and capital rules remains uncertain, private banks say they are currently advising many wealthy clients to buy "proxy" currencies, or currencies that may appreciate with the yuan but that trade freely.

Mr. Gurwitz, for instance, advises clients to buy the Korean won, Taiwan dollar, Philippine peso and other currencies.

"I think everybody realizes that the growth in Asia is what's happening in the global economy, and a lot of people recognize that one of the attractive valuations in the world is the renminbi exchange rate," Mr. Gurwitz says. "But there are lots of good ways to get that access."

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