Chinese Yuan ETFs Back In Focus

by on September 13, 2010 | ETFs Mentioned:

Earlier this summer, investors around the world cheered an unexpected announcement out of Beijing, when the Chinese government announced that it would allow its currency to become more flexible against the U.S. dollar. But since June 19, the date of the landmark currency decision, the Chinese yuan has moved little, and the frustration towards China that initially subsided has gradually returned. Feeling renewed pressure from the international community, China took steps late last week to prove that its stated intentions for the yuan are genuine.

On Friday, following talks between the U.S. and China in Beijing, the People’s Bank of China set the yuan’s reference rate at the highest level against the dollar since the bank began publishing that number about 15 years ago. Despite the move, the yuan has moved less than 1% since the June announcement of enhanced flexibility–supposedly upward flexibility–against the greenback. “China moved to let its currency rise slightly, but its offering may be too little, too late to halt growing momentum in Washington to adopt punitive legislation against Beijing,” writes Andrew Batson.

Beijing’s June concession was supposed to be a major victory for U.S. manufacturers who have seen cheap Chinese goods eat into their market share and compress profit margins. But several months later, U.S. officials have nothing to show for it, with what many believe to be an artificially cheap yuan still boosting sales of Chinese goods to international consumers. After avoiding public criticism of Beijing’s dragging of its feet, U.S. officials are beginning to step up their efforts ahead of mid-term elections in November. Several politicians, primarily those representing manufacturing-intensive regions, are pushing China to ease restrictions on the yuan in what could become a key issue this election season. “The June 19 announcement bought China time, temporarily silencing the growing chorus of complaints that it keeps the yuan undervalued to help Chinese exporters,” writes Batson. But now that time may be running short, and efforts to push the yuan higher may be accelerating [see ETFs In Washington's Crosshairs].

China’s central bank has made it clear that large movements in the yuan are out of the question, meaning that any appreciation of the currency will be gradual in nature. Still, the Chinese yuan is an intriguing long-term investment, as the currency’s rise against the dollar seems inevitable given the current economic and political environments [see Currency ETFs: A Better Way To Play The BRIC?].

Yuan ETFs In Focus

For investors looking to establish exposure to the yuan, there are a couple of ETF options out there [see a list of all currency ETFs]:

  • WisdomTree Dreyfus Chinese Yuan Fund (CYB): This actively-managed ETF seeks to deliver total returns reflective of both money market rates in China available to foreign investors and changes in value of the Chinese Yuan relative to the U.S. dollar. Highlighting the tremendous interest in the Chinese yuan, CYB now has nearly $600 million in assets. The last three months, however, have seen considerable outflows from CYB; more than $200 million flowed out of this fund between June and August. If the U.S. keeps pushing Beijing on the currency issue, don’t be surprised if those figures reverse.

  • Market Vectors Chinese Renminbi/USD ETN (CNY): The other option for yuan exposure is structured as an exchange-traded note, a senior debt instrument linked to the S&P Chinese Renminbi Total Return Index. CNY is considerably smaller in terms of assets and trades less frequently than CYB, but the returns to these two products should be generally similar.

Disclosure: No positions at time of writing.