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China Yuan ETFs in Focus on Trump-Xi Summit

Sanghamitra Saha

The much-awaited meeting between U.S. president Trump and Chinese president Xi Jinping is finally underway. The meeting is likely to hinge on trade (and perceived currency war) as well as North Korea’s missile launches.

Investors should note that the U.S.-China relationship has been chaotic since Trump’s election win in November given the volley of his verbal attacks made toward China’s trade practices. Thus the outcome of the meeting is quite important to global investors as this will likely decide the future course of equity, bond and currency trading (read: What China ETF Investors Should Watch for in Trump-Xi Summit).

China's yuan remained somewhat subdued in recent trading as traders are awaiting the consequence of the meeting. This is because Trump repeatedly indicated that China devalued its currency against the greenback to enjoy unfair trade advantage. The comments were probably rooted in China’s shocking currency devaluation move (by about 2%) in mid-2015 (read: 3 Country ETFs Impacted By China Currency Devaluation).

The step, taken on August 11, shook the global markets and almost all asset classes as the Chinese currency yuan had 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, Chinese authorities follow a trading band around the official reference rate it sets each day for the value of the yuan against the dollar (read: Guide to China Yuan ETF Investing).

The Chinese central bank defended its currency intervention ‘as a free-market reform’, but the move was criticized by U.S. lawmakers then and viewed as a means of taking undue favor in exports. Global experts had also apprehended a currency war at that time.

However, since then, several changes have taken place on the global economic front. In fact, the Chinese renminbi has actually strengthened over 0.8% against the U.S. dollar so far this year (as of April 4, 2017).

Also, in mid-March, China’s central bank hiked borrowing costs, which was a move against currency devaluation and hints at a stable economy. Analysts believe that China has implemented several measures to restore yuan against the greenback to contain capital flight, in the wake of Fed policy tightening. Also, China “opened up the domestic bond market and the fund management sector to foreign companies.”

Some analysts expect the yuan to be relatively steady against the U.S. dollar in the near term, as the dollar seems to be out of gas lately. The overvaluation concerns of U.S. stocks and fading Trump trade probably dampened the price of dollar to some extent. A turnaround in the Chinese economy and government’s strict capital control are also likely to play a key role in keeping the yuan steady in the near term.

Against this backdrop, Chinese yuan ETF will likely to be on investors’ radar. Below we highlight the fund in detail:

WisdomTree Chinese Yuan Fund CYB

The fund looks to track total returns reflective of both money market rates in China available to foreign investors and changes in the value of the Chinese Yuan relative to the U.S. dollar. It has amassed about $36.2 million in assets. The fund charges 45 bps in fees and trades in lighter volumes of about 10,000 shares a day.

Want to learn more about China ETF investing? Check out our recent podcast below for additional information!

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WISDMTR-CH YUAN (CYB): ETF Research Reports
 
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