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Guide to China Yuan ETF Investing

Zacks Equity Research

The month of August 2015 can find a place in history solely because of China’s yuan devaluation by about 2%. The step, taken on August 11, shook the global markets and almost all asset classes as the Chinese currency 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 the yuan against the dollar.

The Chinese central bank defended its currency intervention ‘as a free-market reform’, but the move was criticized by U.S. lawmakers and viewed as a mean of taking undue favor in exports.  Global experts had apprehended a currency war in the near future, especially among the Asian tigers and true to their fears; Vietnam has already widened its currency band from 2% to 3% to stay competitive on the export market.

A slew of discouraging economic data from China has been blamed for weakening yuan. Its exports plunged 8.3% year over year in July, falling widely short of analysts’ expectation of 1.5% decline and deteriorating from the 2.8% drop-off recorded in June.
Protracted slowdown in its manufacturing sector and a 24-year low economic growth in 2014 made this devaluation a targeted step to boost a sagging economy, as per several market experts (read: Profit From China Sell-Off Via These Inverse ETFs).

Impact

Per Bloomberg, China’s foreign-exchange reserves are likely to see a $40 billion plunge per month.  Not only this, a Bloomberg survey expects the currency to fall 1.6% to 6.5% against the greenback for the balance of 2015. Also, to restrain the incessant flight, the Chinese central bank is expected to intervene at regular intervals over the next three months. This move will be to ensure that the currency is stable and will be allowed to devalue within the specified range since an acute plunge in yuan would deteriorate the already worse case of a capital flight.

Yet to be a Reserve Currency

If this is not enough, the International Monetary Fund put its decision of using Chinese yuan as a reserve currency on hold for a year post this evaluation episode. Analysts believe that yuan will find it hard to make an entry into the basket of reserve currencies, presently formed by the dollar, yen, euro and the pound, unless it can move and trade freely.

Future Move More Market Oriented

The Chinese government announced that the renminbi’s central parity rate will follow the previous day’s closing spot rates more closely from now onward. 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. As stated earlier, the Chinese central bank assured the market that it would promptly intervene into the currency market if depreciation crosses the 3% mark.

Options to Play

In this backdrop, investors might be worried of investing in Chinese yuan as it is hard to get a handle on the currency’s future returns in one way or another. Though the future movements in yuan could be both ways, yuan-based investments should be closely watched before thronging the space in quest of alternative currency exposure.

While Chinese stocks are too risky at this time owing to overvaluation concerns and excessive government interference, Chinese yuan ETFs could be a low risk choice. But great caution needs to be exercised to play this arena (read: Inside The Crash in China ETFs).

WisdomTree Dreyfus Chinese Yuan Fund (CYB)

The most popular Chinese yuan fund is CYB from WisdomTree. The product invests in short-term, investment grade instruments in order to be reflective of both money market rates in China available to foreign investors, and changes in the value of the yuan against the dollar.

The product charges investors 45 basis points a year but sees decent average volumes of 50,000 shares a day on AUM of over $93 million. The fund currently has a Zacks ETF Rank #3 (Hold) with a low risk outlook. In the last 10 days (as of August 20, 2015), the fund lost about 4.2% and is down 2.2% so far this year (read: Be Weary of 3 ETFs as Chinese Yuan Weakens).
Market Vectors-Chinese Renminbi/USD ETN (CNY)

For investors seeking an ETN way to target the Chinese currency, CNY is the right option. This product tracks the S&P Chinese Renminbi Total Return Index which looks to track the performance of the Chinese currency against the U.S. dollar, by rolling three-month non-deliverable currency forward contracts.

The fee is a bit higher at 55 basis points a year while volume comes in below 5,000 shares a day, suggesting wide bid ask spread and ever-increasing total costs. The product is down 2% so far this year and lost over 6.7% in the last 10 days (as of August 20, 2015). The ETN currently has a Zacks ETF Rank #3 (see all currency ETFs here).
 
CurrencyShares Chinese Renminbi Trust (FXCH)
 
This product looks to track the price of the Chinese Renminbi net of Trust expenses. The product has amassed about $7.7 million in assets while it sees weak volumes of around 1,000 shares a day, suggesting a wide bid ask spread. On the positive side, the ETF has the lowest expense ratio at just 40 basis points a year in the Chinese currency ETF space. The fund has lost 2.3% this year and retreated 2.4% in the last 10 days (as of August 20, 2015). This fund also carries a Zacks ETF Rank #3.

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