Speculators who want make a profit by taking advantage of the forex spread difference between the renminbi and other currencies should not think of this as a risk-free practice because currency arbitragers may have incurred huge losses due to the recent sharp dive in the Chinese currency, reports Chinese web portal Tencent QQ.
Individuals can earn money from foreign exchange arbitrage, buying currency in one financial market and selling it for a profit in another. For instance, while mainland China has strict currency controls in place, Hong Kong is open to currency transactions.
While the renminbi continued its upward trend, speculators from around the world had bought the Chinese currency through the foreign exchange market in Hong Kong, driving up the value of the renminbi. These investors also discovered they could earn a considerable profit by investing the Chinese currency in Hong Kong, the report said. However, they needed to meet two requirements before taking advantage of the forex spread. First, they had to be part of an export and import business. Second, they had to have a partner in banks located in Hong Kong.
Due to Beijing's currency control policy, large amounts of the renminbi could only be channeled in or out through trading or underground banks. If an investor took US$1 million from a Chinese bank and converted it into 6.2 million yuan based on an onshore exchange rate of 6.2, they could import a commodity from Hong Kong and pay the local suppliers in renminbi, namely offshore renminbi, the report explained.
The investor could then convert the renminbi into US dollars at a higher exchange rate of 6.15 through his partner in Hong Kong. The value of the renminbi would then become US$1.00813 million.
Eventually, the individual could also export the imported goods to his Hong Kong partner and be paid in the greenback. This meant that the investor could earn US$8,130 from the process, the report explained.
In addition to the forex spread, currency arbitragers could earn the interest rate spread between banks in China and Hong Kong, given Hong Kong's low interest rates, the report added.