The Chinese yuan has been artificially weakened against the U.S. dollar as China engaged in a decade long export-driven strategy for economic growth. However, China is beginning to shift towards domestic expansion, and the yuan, along with the currency related exchange traded funds, may finally appreciate closer to a fair market value.
China is beginning to adopt policies toward focusing on domestic growth, as demand for Chinese exports have weakened following the 2008 financial downturn, according to a Barclays research note.
Consequently, the total trade imbalance between China and the U.S. has dropped to between 40% and 50% of the total U.S. trade deficit from up to over 80% before 2008.
“We can take this as evidence that, while the two countries’ trade-weighted exchange rates may now be closer to ‘fair value,’ the Chinese currency is still undervalued relative to the U.S. dollar,” Barclays said in a note.
Since 2008, the Chinese government has allowed the renminbi to appreciate against the U.S. dollar at an annual rate between 2% and 3%.
In mid-April, the People’s Bank of China announced that it would double the daily trading band to 1% on currency trades. [Currency ETFs: Chinese Yuan May See Higher Volatility]