A Contrarian Play with China ETFs | ETF Trends

Investors who are betting on a turnaround in the Chinese markets may want to consider a currency-hedged China A-shares exchange traded fund, especially with Beijing’s preference for a weaker currency.

The difference between the Chinese renminbi’s two exchange rates widened to a record, adding to speculation that Beijing will likely allow its currency to depreciate at a faster-than-expected pace, the Financial Times reports.

The offshore renminbi dipped to as much as Rmb6.72 against the dollar Wednesday. Meanwhile, the onshore rate ended at Rmb6.55. The U.S. dollar has gained about 5.5% against the Chinese currency over the past year.

“During our investor meetings in December, the most significant risk that investors were worried about was a substantial devaluation of the renminbi,” Timothy Moe, Goldman Sachs’ chief Asia-Pacific equity strategist, said in a research note.

The People’s Bank of China has pledged to narrow the gap between the two rates as part of its effort to make the currency “freely usable.” Consequently, the quickly depreciating offshore rates are adding to fears that the Beijing could also match the currency depreciation.

“In general, we think that the Chinese authorities will tolerate more weakness in the renminbi for the time being,” Zhou Hao, strategist at Commerzbank, told the Financial Times.

Consequently, ETF investors who believe the Chinese markets may turn around but are wary of further currency depreciations may take a look at currency-hedged China A-shares ETFs to diminish the currency risk.