Yuan Promotion Could Help Support China ETFs
The Chinese currency will strengthen when the yuan enters the International Monetary Fund’s basket of reserve currencies as it joins the dollar, euro, pound and yen. With the importance of the yuan growing as an alternative to the U.S. dollar, investment flows into China could help support Chinese markets and country-specific exchange traded funds.
While China is the second largest global economy and one of the largest trading countries, the yuan currency has experienced limited use in the global economies, account for just a fraction of all payments in international trades. According to the Society for Worldwide Interbank Financial Telecommunications, the yuan made up just 1.72% of global payments, the lowest since 2014.
However, after Beijing’s increased regulatory improvements, the International Monetary Fund will include the yuan in the Special Drawing Rights basket on October 1, which could entice central banks and large institutions to begin acquiring more Chinese assets.
The yuan will be admitted into the IMF’s SDR basket with a weight of 10.92%, compared to the USD’s 41.73% allocation and the JPY’s 8.33% position.
The inclusion of the yuan in the SDR basket may push Beijing to implement further forms in China, including advances in its capital account liberalization. For instance, China recently implemented the Shenzhen-Hong Kong Stock Connect program to expand lists of mainland-listed companies that foreign investors can access.
“We continue to see China’s economic transition as ongoing, yet we expect a nonlinear growth path as policymakers juggle between fiscal and monetary stimulus, and structural reform,” according to a BlackRock research note. “After months of slow and steady devaluation, the renminbi has found some stability; the currency will be added next month to the IMF Special Drawing Rights basket, which should provide further support.”
Consequently, investors interested in gaining exposure to the potential growth spurt ahead, as China implements greater reforms and opens its market, can look to a number China country-specific ETFs.
Investors can access Chinese markets directly through options like the VanEck Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: PEK), VanEck Vectors ChinaAMC CSI 300 ETF (NYSEArca: CNXT), iShares MSCI China A ETF (BATS: CNYA) and db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR).
PEK tracks the CSI 300 Index, which includes the 300 largest and most liquid stocks in the China A-shares market. CNXT includes the 100 largest China A-shares stocks listed on the Small and Medium Enterprise Board and the ChiNext Board of the Shenzhen Stock Exchange. CNYA tracks an MSCI index composed of Chinese equities listed on the Shanghai and Shenzhen Stock Exchanges. ASHR also tracks A-shares taken from the CSI 300 Index.
Moreover, investors can gain exposure to China through the iShares China Large-Cap ETF (NYSEArca: FXI) and SPDR S&P China ETF (NYSEArca: GXC), which track Chinese companies listed on the Hong Kong stock exchange. These H-shares China ETFs are trading at attractive valuations. FXI shows a 9.78 price-to-earnings and a 1.09 price-to-book, and GXC has a 10.71 P/E and a 1.18 P/B, compared to ASHR’s 13.73 P/E and 1.59 P/B. With greater reforms and liberalization of Chinese markets, H-shares may begin to outperform A-shares as the two markets begin to move closer in line with one another.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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