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IMF Green Signal Put Yuan ETFs in Focus

Zacks Equity Research

The Chinese economy is telling us two different stories at a time. While on one hand, the Chinese economy is persistently delivering offhand economic numbers and even raised hard landing fears at some point of time, its currency yuan received a privileged reserve status from IMF recently.  


Notably, the inclusion of yuan to IMF’s reserve currency list gives the economy a cream-of-the-crop class as this emerging currency will now sit beside the developed currencies like the U.S. dollar, pound, euro and yen. Also, the IMF nod indicates economic stability in China. The IMF’s executive board, which represents the fund’s 188 member nations, recently settled on the fact that the yuan now enjoys a “freely usable” status.


The move marked the first change in SDR’s currency portfolio since 1999, per Bloomberg. Not only this, China’s currency will have a weight of 10.92%, higher than yen (8.33%) and pound (8.09%) but lower than the euro (37.4%) and the U.S. dollar (41.9%). The move will take effect in October 2016.


Why the Move?


Though several theories are doing rounds right now, both positive and negative, IMF viewed it as the consequence of reformative measures presently being undertaken in China. However, one school of analysts addressed the decision as ‘political’ and is not counting on the easy accessibility of the currency because yuan cannot be transferred into other currencies without restrictions.


The believer of this school also indicated that the IMF head “realized how bad things are in China, so what she (Christine Lagarde) decided to do was to throw China a lifeline.” This way IMF boss can press the

Chinese government to launch a total convertibility for its currency.


Notably, the Chinese economy is on its way to deliver a 25-year low expansion this year. Despite the roll-out of a flurry of measures, the economy has showed no signs of a steady recovery and financial markets remained highly volatile due to extreme risk-taking.


Investors should also note that movements in the yuan market have been rampant this year. 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 (read: Be Weary of 3 ETFs as Chinese Yuan Weakens).


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 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. Most importantly, the Chinese central bank assured the market that it would promptly intervene into the currency market if depreciation crosses the 3% mark.


Busy Trading in Yuan


The yuan became the fifth-most active currency for global payments by value in October with a market share of 1.92%, per the global transaction services organization SWIFT. Not only this, the Chinese currency beat the Hong Kong dollar and the U.S. dollar, for payments between Japan and China/Hong Kong in October.


Standard Chartered and AXA Insurance estimate that IMF’s green signal will offer yuan a minimum of $1 trillion of movement. Needless to say, this historic move makes it important to look at the Chinese yuan 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 $64.4 million. The fund currently has a Zacks ETF Rank #3 (Hold) with a Low risk outlook. The fund is down over 1.2% so far this year (as of December 1, 2015) (read: Top ETF Stories of August).


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 a wide bid ask spread and ever-increasing total costs. The product is down 0.6% so far this year. 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 2.7% this year and carries a Zacks ETF Rank #3.


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WISDMTR-CH YUAN (CYB): ETF Research Reports
 
MKT VEC-RENMINB (CNY): ETF Research Reports
 
CURR-CHIN RENMN (FXCH): ETF Research Reports
 
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