According to an article from Bloomberg last week, Chinese officials told EU chamber that the yuan will achieve “full convertibility” by 2015. The People’s Bank of China said on Aug. 1 it will manage the yuan more actively against a basket of currencies, instead of just the dollar, and allow market forces to play a greater role.

Yuan has been in great demand in recent years as investors have started to lose confidence in Euro and USD which were the dominant trading currencies in the past. China has accelerated the use of the yuan in international trade, and took several steps. China’s announcement to launch yuan foreign-exchange options is another significant move.

With US deficit and Euro Debt Crisis, there are many talks that Yuan will be the next safe haven. Yuan products have bloomed especially since last year. However, investors must be wary of the products offered in the market. Given the current yuan restriction, many are CNH products, which are more complicated and less liquid (wider spread).

In addition, many investors buy yuan products because they were sold the idea of potential yuan appreciation. Though CNY has appreciated against USD. The chart below shows that SGD has in fact appreciated faster than CNY in the past two years.

SGD/CNY as Sep 18,2011 (source: Yahoo Finance)

Wall Street Journal —China will launch domestic trading of yuan options against other currencies in Apr, a significant move that signals Beijing’s intention to tolerate a more flexible and volatile currency and further internationalize the yuan.

The State Administration of Foreign Exchange, China’s foreign-exchange regulator, said in a statement Wednesday that it will initially launch trading of so-called European-style yuan options on the interbank market. Businesses will be allowed to buy call and put options from banks, it said, but not to sell them unless they are squaring positions, which means they are bringing their buy and sell positions equal.

China Yuan has become increasing popular due to its booming economy and appreciation of the currency. The yuan had risen 3.7% against the U.S. dollar since June, many investors want to go into the market but are much restricted.

Recently DBS Launches Yuan Products, but investors must be wary on the risks of investing in their Yuan product.  According to LionInvestor :

The offshore yuan (CNH) is actually less liquid compared to the onshore Renminbi (CNY) and investors could be investing at very wide spreads.

If you are considering investing in a Yuan product (or any other foreign currency fixed deposit for that matter), always compare the spread and not only the interest rates that the bank is offering you.

With CNH spreads going up to as wide as 8%, you will need to be a long term investor to reap the benefits of Yuan appreciation.