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.
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]
ASHX tracks the CSI 300 USD Hedged Index, which is designed to provide direct access to China A-shares while diminishing the negative effects of a depreciating Chinese yuan currency against the U.S. dollar. The CSI 300 Index covers the 300 largest A-shares on mainland Shanghai and Shenzhen exchanges.
Additionally, the CSOP MSCI China A International Hedged ETF (NYSEArca: CNHX) also acts like the currency-hedged version of the KraneShares Bosera MSCI China A ETF (NYSEArca: KBA).
CNHX tries to reflect the performance of the MSCI China A International with CNH 100% Hedged to USD Index, which includes Chinese A-shares listed on both the Shanghai Stock Exchange and Shenzhen Stock Exchange while also mitigating exposure to fluctuations in the Chinese renminbi relative to the USD.
Potential investors, though, should be aware that the two currency-hedged China A-shares ETFs are still relatively new and show low volumes, so people should use limit orders to better control trades.
Max Chen contributed to this article.