The Chinese renminbi currency is trading at its weakest to the U.S. dollar in over four years and may continue to depreciate. Consequently, investors who have been adding China A-shares exposure may want to consider a currency-hedged exchange traded fund.
The USD was trading around RMB6.4179 Tuesday. The Chinese currency has weakened to its lowest level against the greenback since early August 2011.
The renminbi has been depreciating as investors tried to test how far Beijing was willing to let its currency decline in light of a slowing economy, reports Jennifer Hughes for the Financial Times.
“It appears that China’s central bank intends to engineer a managed depreciation in the renminbi as the economy slows, which makes sense from both policy and economic perspectives,” Commerzbank strategist Zhou Hao told the Financial Times.
Additionally, bets for a softer currency have increased since the International Monetary Fund elevated the renminbi to reserve status late last month. The IMF added the RMB to a group of elite global currencies on the expectations that China will continue to reform its financial markets.
HSC strategists lowered their 2016 year-end forecast for the renminbi to RMB6.7. Goldman Sachs has targeted a RMB6.6 by the end of next year.
Consequently, with the weakening Chinese yuan outlook, U.S. investors seeking China equity exposure may be exposed to currency risks – a weaker currency means that returns are lowered when converted back into USD.
Alternatively, ETF investors may take a look at currency-hedged China A-shares ETFs to diminish the currency risk.
For instance, the Deutsche X-trackers CSI 300 China A-Shares Hedged Equity ETF (NYSEArca: ASHX) acts as a hedged version of the popular Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR). [2 New Currency-Hedged China A-Shares ETFs]