China's renminbi (RMB) has been a popular currency among savvy, sophisticated investors looking to play into China's growth story, as the US, Europe and the rest of the developed world continue to remain anaemic. For longer-term investors looking to take advantage of this growth story, understanding the broader economic picture is crucial.

It is worthy to note that while growth in China is slowing down, the Chinese authorities' capacity to undertake fiscal stimulus, should the global situation call for it, offers valuable cushion to market sentiments. This has been aided by its inflation figures that have stayed within acceptable range. Apart from the cuts to the reserve requirement ratio for banks, its central bank has also embarked on policy rate cuts. The fact that China's gross public debt remains low has also helped. Overall, we see growth pace picking up in China as such easing measures start to bolster growth.

The RMB or yuan is increasing in popularity as an offshore trading and investment currency, aided by the opening of China's capital account, strong demand in the offshore yuan deposits market and the establishment of the yuan as a major currency for trade and financial market transactions. According to the Hong Kong Monetary Authority, the daily turnover of the Hong Kong offshore yuan market (including both spot and forward transactions) is around $3-5 billion, with Dim Sum issuance in 2011 totaling 108 billion yuan ($17.10 billion).

China has pledged to make the yuan fully convertible by as early as 2015 and is steadily opening up its capital account. The Chinese government is encouraging private capital outflows while increasing the flexibility of the yuan. As a result of the yuan-FDI and outward direct investment schemes introduced, we have seen a large increase in capital account-related yuan transactions this year.

The offshore yuan deposits space has also been one of much activity. The latest Dim Sum offer by China Development Bank Corp saw great demand from central banks across Africa, the Middle East and Europe, testament of how countries are diversifying their foreign exchange reserves into the Chinese currency and seeking alternatives for better returns amid concerns around the long term prospects of the greenback. This trend is set to continue, not just among central banks but also institutional and retail investors.

While the US dollar is still dominant as the main trade-invoicing currency, yuan has become the third largest trade-invoicing currency. China has also signed currency swap agreements with a number of economies globally, and this will further increase international acceptance of the yuan, among others, as a trade currency.

Many investors, from the retail to sovereign segment, have been keen to participate in China's growth story, especially with growing concerns of the US fiscal deficit and the greenback as the only global reserve currency. Since the yuan de-pegged from the greenback in the middle of 2010, it has appreciated gradually over 7 percent, and is increasingly being viewed as a possible global reserve currency and a hedge to the greenback.

For investors looking at investing in the yuan, it is essential to adopt a macro approach. The yuan, just like any currency, is subjected to cyclical, seasonal, structural and political influences which may bring about unforeseen and undesirable volatilities. Maneuvering through this volatility especially in the world of short-term FX trading can be challenging. For most investors, it is prudent to adopt a longer investment horizon, taking into consideration China's growth and potential of the yuan. I am positive on the yuan, expecting it to strengthen over time and rise to 6.23 against the dollar in one year.

The author is chief economist at CCBI. The opinions expressed here are entirely his own.

(HK Edition 09/18/2012 page2)