If the International Monetary Fund includes the Chinese renminbi currency as part of its supplementary foreign exchange reserve assets, Chinese equities and country-specific exchange traded funds could advance as global indices and investors raise their China exposure.
Year-to-date, the iShares China Large-Cap ETF (NYSEArca: FXI), the largest China-related ETF that tracks Chinese companies listed on the Hong Kong stock exchange, rose 25.4%. Similarly, other China H-shares ETFs have strengthened, with the SPDR S&P China ETF (NYSEArca: GXC) up 24.3% and the iShares MSCI China ETF (NYSEArca: MCHI) 27.0% higher.
Additionally, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), which tracks mainland Chinese A-shares, increased 33.4% so far this year while KraneShares Bosera MSCI China A ETF (NYSEArca: KBA) gained 37.4% and the Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK) returned 36.6%.
Chinese equities could maintain their momentum ahead if the International Monetary Fund decides to include the RMB currency in its special drawing rights, or SDR – the SDR represents the value of a basket of key international currencies reviewed by the IMF every five years, which include U.S. dollars, euro, U.K. pound sterling and Japanese yen.
An endorsement by the IMF would improve China’s position in the global economy and financial markets, reports Henny Sender for the Financial Times.
For instance, Michael Cembalest of JPMorgan Asset Management pointed out that Chinese H-shares makes up 2.5% of the MSCI All Country World Index, but if the RMB is convertible enough, mainland A-shares could be included in the index, which could lift China’s weight to over 10% of the benchmark.
Moreover, Chinese equities and related ETFs may have more room to run as active fund managers shift from their underweight China exposure. Active managers may be pressured to increase their positions in the Chinese markets after funds have underperformed their benchmarks for their worst performance since 2009. [Underweight Active Managers Could Add to Rally in China Stocks, ETFs]
The renminbi is becoming an increasingly important investable currency. Cembalest said that central banks and sovereign wealth funds have invested between RMB300 billion and RMB400 billion in renminbi-denominated assets, and the European Central Bank has also stated that it is considering investing in RMB-denominated assets as well.
iShares China Large-Cap ETF
For more information on China, visit our China category.
Max Chen contributed to this article.
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.