Markets

Weaker Yuan Put Currency-Hedged Chinese ETFs in Focus

Devaluation fear is gripping the Chinese currency yuan market again after five months. The currency fell to a four-month low level last week and stoked possibilities of further weakness going forward.

A host of reasons are responsible for this. First, the relentless flow of offhand economic data added fuel to hopes for further stimulus measures. The Chinese economy is on its way to deliver a 25-year low expansion this year. China has already rolled-out a few of policy easing measures which haven't yet materially lifted economic growth. The likeliness of more easing should devalue the currency ahead.

In August, China's central bank devalued the currency by 2%, following which yuan posted the largest single-day decline since the historical devaluation in 1994, after the country arranged its official and market rates in a line.

Notably, the Chinese authorities follow a trading band around the official reference rate it sets each day for the value of yuan against the U.S. dollar. The Chinese government announced in August that renminbi's central parity rate would follow the previous day's closing spot rates more closely going forward.

This indicates China's intent to make its currency more market driven. As a result, a section of analysts believe that the actual motive behind this currency move was to prepare yuan as a reserve currency. However, the Chinese central bank assured the market that it will promptly intervene into the currency market if depreciation crosses the 3% mark.

Now, with yuan getting the IMF nod to join the reserve currency basket from October 2016, China's efforts the make the currency more "freely usable" and market oriented will likely go on (read: IMF Green Signal Put Yuan ETFs in Focus ).

Last week, the currency weakened for two successive sessions amid lower fixings from the central bank, per CNBC . At the current level, yuan hovers around a four-and-a-half year low as PBOC fixed the yuan/dollar official midpoint 'at its weakest since July 2011'.

If this weakening continues, Asian emerging markets which are largely involved in exports would end up in a currency-war. Most export-centric economies will likely be forced to depreciate their currencies to stave off competitive and rev up their exports (read: 3 Country ETFs Impacted By China Currency Devaluation ).

The investing world is divided into two clusters. While one part believes that there is no basis for persistent yuan depreciation, the other believes that extra devaluation is needed for the balance of payments' adjustments, and for the authorities to jumpstart the economy and stamp out deflationary fears.

The PBOC announced late last Friday that it has rolled out a yuan index rate against a basket of currencies, rather than tracking the greenback solely. Some see this as an indication of further weakening in yuan.

ETF Impact

Un-hedged ETFs tracking the nation have actually outperformed the broader market so far in Q4. Investors should note that even after such speculation, yuan declined just 0.26% against the U.S. dollar from August 12 to December 10, which is not at all a material devaluation (read: 5 China ETFs Up At Least 20% in Q4 ).

Still investors fearing yuan devaluation but still wishing to be invested in China ETFs, might try these two below-mentioned currency-hedged ETFs (read: New China Currency-Hedged ETFs Head-to-Head ).

MSCI China A International Hedged ETF (CNHX) in Focus

The CSOP MSCI China A International Hedged Exchange Traded Fund looks to track the performance of the MSCI China A International with CNH 100% Hedged to USD Index. The index delivers the performance by hedging the currency exposure of the MSCI China A International Index, to the USD. The index is 100% hedged to the USD by selling Renminbi currency forwards at the one-month forward rate.

Making its debut in mid October, the fund has amassed about $3 million in assets. It charges 79 bps in fees. The index is heavy on financials which makes up about one-third of the portfolio followed by Industrials (17.9%). The 381-holding product is extremely diversified in nature with no stock accounting for more than 0.01% of the basket.

X-trackers CSI 300 China A-Shares Hedged Equity ETF (ASHX) in Focus

The Deutsche X-trackers CSI 300 China A-Shares Hedged Equity ETF looks to track the CSI 300 USD Hedged Index. The fund has amassed about $2.5 million in assets and its expense ratio is 0.85%. This index also has a tilt toward the financial sector with about 40% exposure. Industrials (17.1%) and Consumer Discretionary (11.2%) take the next two spots.

In short, the fund is the currency-hedged version of the fund Deutsche X-trackers Harvest CSI300 CHN A ( ASHR ). Notably, the 300-stock ASHR is also a diversified fund, though not as wide as CNHX. The top holding of ASHR takes 4.05% of the fund.

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CSOP-CH A IH (CNHX): ETF Research Reports

DEUTS-XT C300 A (ASHX): ETF Research Reports

DEUTS-XT HV CS3 (ASHR): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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