Reader Jonathan wrote in the tell me that the Bank of China (BoC) is offering FDIC-insured bank accounts that are denominated in renminbi, the official currency of China. Also referred to by the primary unit yuan, you may have heard about how China tightly controls this currency in the news. Since many sources view the yuan as being undervalued relative to the dollar due to artificial exchange rates, some people view holding yuan as a good investment. Here’s how the Bank of China news has played out in financial websites.

• 1/12 – The Financial Times blog BeyondBRICs brings up the ability to open accounts in yuan, but says “No need to rush out and open a renminbi account just yet.” They note that this ability has actually been around since February 2010, but nobody in the media really noticed.
• 1/12 – The Reuters blog by Felix Salmon picks it up and brings it a step further, pointing out that US officials have said the yuan is overvalued, so that “Chinese revaluation is going to happen at some point, and when it does, you’ll make money”, and “the downside is limited”. More excitement.
• 1/14 – The Wall Street Journal blog ROI joins the fray, stating (1) It’s very unlikely to go down. (2) It’s very likely to go up. (3) You won’t miss out on a lot of interest elsewhere, as nowhere else is paying a lot of interest. (4) It will diversify your portfolio. (5) It may offer you and your family something of a hedge against the decline of the U.S. economy. Can you feel the buzz?
• 2/7 – Time Magazine blog Curious Capitalist has another post on the topic a few weeks later. It provides more detail on what this account does not offer: interest, the ability to withdraw yuan, deposit yuan, write checks, or use debit cards. Basically you can speculate on the conversion rate of USD-CNY and that’s it. More below.

So, should you go out and open an account? Well, first you must go in person to a Bank of China branch in New York City, either at Madison & 48th St or in Chinatown. Some of the articles erroneously reported that you can open up an RMB account at the Los Angeles branch. According to the Bank of China website, this is not true. The branch does not offer FDIC-insured accounts, and doesn’t offer personal account of any kind.

The limit a U.S.-based individual customer can exchange is $4,000 a day. From what I have gathered, you open an account and “buy” RMB from Bank of China using your U.S. dollars. Your deposits are FDIC-insured against bank failure, but not losses from currency fluctuations. If you wish to withdraw, you must again exchange your RMB back to USD, leaving you again with dollars. You can’t withdraw any RMB, here or in China. The savings account earns no interest. So any difference will be due to the exchange rate.

According to the Wikipedia entry for Remminbi, academic studies have shown then yuan to be undervalued relative to the dollar using “purchasing power parity analysis”. The Treasury Secretary called it “substantially undervalued” a month ago. Per this article, the rate of 6.5855 CNY to 1 USD set just yesterday (2/16) is a record high, leaving the yuan up 3.6% since last June.

I honestly don’t pay enough attention to currency markets and all the politically-related news to really weight the pros and cons properly. Even if it does seem like the yuan is undervalued right now, but who knows when or how it will be corrected? China sets the exchange rate for the most part, so it could be years or more. During that time, its economy could experience high inflation as well which could make RMB even weaker relative to USD.

I see no sure bet here, just a speculative investment. But if you have a “play money” account capped at 5% of your portfolio like I do at times, this might be one idea that you could drop some bucks on. What do you think?

Update: You can get basically the same thing online at Everbank WorldCurrency Access deposit account. It doesn’t currently earn any interest, and unfortunately there are no interest-bearing CD options available right now either. But it does let you get it renminbi-denominated.

The results of my Emergency Fund survey are in, and appears that there are a lot of big savers out there! 28% of respondents had cash reserves of over 12 months of expenses, and 24% of you had the more-often recommended 4-6 months of expenses.

With such sizable cash reserves, where you do guys put it all? I figured I’d share my stash-the-cash choices, which may not be perfectly optimal but I’m open to talking about it. The size of the circles are proportional to how much of my money I keep in each respective account.

With interest rates so low across the board and still dropping it seams, it’s been hard to get really excited about many new options. But remember, it can be better to be earning 2% with low inflation than 5% interest in a high inflation environment. Every basis point helps.

Rewards Checking Accounts

You’ve likely heard of these by now. Usually through local credit unions, these checking accounts pay a higher interest rate if you jump through some hoops each month. However, if you make a mistake you’ll forfeit virtually all your interest for that month, so it can be tricky. More coverage here.

One nationally-open example is DanversBank, which offers their Free Rewards Checking currently paying 3.01% APY on balances up to $25,000, provided you satisfy the following each month:

* perform at least 12 debit card transactions (excluding ATMs);
* receive their monthly statement electronically;
* access Online Banking, and
* sign up for direct deposit or receive a recurring ACH transfer

To find a local rewards checking account limited to your area, check out DepositAccounts and use the filters. Sadly, my local account recently dropped their rate significantly.

Long-Term CDs – Ally Bank

If you have a large cushion, it’s quite possible (if you’re lucky) to not have to touch it for years or more. Therefore, I think it’s okay to put some of it in safe investments but slightly less liquid.

With the Ally Bank certificates of deposit, you can still access your money as long as you pay a early withdrawal penalty of 60 days interest. That’s significantly less than at other banks. I have a 5-year CD paying 3% APY, but the current rate for new deposits is 1.60% APY for a 5-year CD (as of 10/25/13).

Rates change constantly, but let’s assume you have a certificate of deposit from any bank paying 2.39% APY with an early withdrawal penalty of the last 60 days of interest. (2.39% APY ~= 2.26% rate compounded daily.) Here’s how your actual annualized interest rate would fluctuate given your holding period.

After just 6 months, you’ll already be earning 1.58%, more than a comparable 12-month CD. If you somehow had to withdraw after 1 year, you’d still have earned 1.99% APY. Basically, after just 6 months I have nothing to lose and a lot to gain, so I keep a sizable chunk here.

Savings Bonds

I have some older Series I Savings Bonds, but they aren’t a very good buy right now. The total rate consists of a fixed rate and a variable rate that adjusts with inflation every 6 months. If you bought a bond now, you’d get a 0% fixed rate and only 0.74% from inflation. However, my older bonds have higher fixed rates, and according to my TreasuryDirect statement they are earning 1.74%, 2.25%, and 2.75% right now. The annual purchase limit is now $5,000 in paper I-bonds and $5,000 in online I-bonds per Social Security Number. I’ll keep them for a while, as I like the tax deferral benefits and inflation may come back to bite us.

Online Savings Accounts

Rewards checking account and savings bonds have deposit limits, and you only want to lock up a certain amount in longer-term CDs, so the rest goes into the now-popular online savings account. There are a lot of players out there now, but many of them are packed together with very similar features and interest rates.

Right now the rest of my cash is over at SmartyPig.com, an FDIC-Insured bank account that lets you save for specific goals like an online piggy bank. However, they’ve added so much flexibility that you can pretty much use them like any other savings account. Their rate has dropped recently from 1.75% APY to 1.35% APY for balances up to $50,000. This is still amongst the top rates, but I’ll be watching them closely.

Alternatively, Everbank has their Yield Pledge Money Market paying 1.10% APY for the first 6 months for new accounts. This rate is higher than any 6-month certificates of deposit currently available, while still being available for withdrawals at any time. The rate is guaranteed stay in the top 5% of competitive accounts. Evantage Bank has their Mega Money Market account paying 1.75% APY for balances up to $35k. Most other banks are clustered around the 1% to 1.2% mark.

So… where’s your cash?