Play the Chinese Yuan’s Fortunes with These ETFs

The Chinese yuan has been pegged to the fortunes of the U.S. dollar, but that may no longer last. There are two ways to play the yuan with exchange traded funds (ETFs), as interest-rate differentials widen and China adopts a more traditional model of growth.

Yi Gang, head of the State Administration of Foreign Exchange, stated that policymakers will keep the Chinese yuan’s exchange rate at a “reasonable and balanced level,” reports Judy Chen for BusinessWeek. Central bank Governor Zhou Xiaochuan has indicated that the timing of “normalizing” policies won’t occur until the global economic recovery is more “solid.”

Bloomberg estimates that the yuan may gain in the second half of 2010 and appreciate between 3.4% to 6.6% against the dollar by year’s end.

The upward pressure on the yuan might be because of the widening interest-rate differential, says Gang. The spread between China’s one-year deposit rate and its U.S. equivalent hit 1.43% on Tuesday. China holds $2.4 trillion in foreign-exchange reserves, the largest in the world.

The International Monetary Fund Managing Director Dominique Strauss-Kahn stated that China’s yuan is still “very much undervalued,” reports Ed Corpley for Reuters. Strauss-Kahn said that “the crisis has been the trigger for the Chinese economy to move to a more traditional model of growth” and “what goes with this kind of policy is a revaluation of the Chinese currency.”

For more information on the yuan, visit our Chinese yuan category. Or take a look at our ETF currency report.

• WisdomTree Dreyfus Chinese Yuan Fund ETF (NYSEArca: CYB). CYB tries to produce the total returns reflective of both money market rates in China that is available to foreign investors and change in value of the yuan versus the U.S. dollar. The fund is not a “money market” fund, but it does invest in short-term, investment-grade instruments.

• Market Vectors Renminbi/USD ETN (NYSEArca: CNY). CNY is an exchange traded note (ETN) that delivers exposure to the exchange rate of foreign currencies. The fund tries to reflect the performance of the S&P Chinese Renminbi Total Return Index.

Max Chen contributed to this article.