The yuan has been depreciating against the U.S. dollar on the strengthening U.S. outlook and tightening Federal Reserve monetary policy. Nevertheless, investors who still believe in an growing Chinese market may turn to currency-hedged country-specific exchange traded fund options to limit currency risks.
ETF investors who believe the Chinese markets may turn around but are wary of further currency depreciation 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). Over the past three months as the Chinese yuan depreciated 4.0% against the U.S. dollar, ASHR fell 3.4% while ASHX gained 1.3%.
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). Over the past three months, CNHX rose 1.5% while KBA decreased 5.7%.
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.
The Chinese yuan has weakened against the U.S. dollar this year, especially in recent weeks, falling toward an eight-year low against the greenback, Bloomberg reports.
Now, Beijing is vowing to maintain stability against in its yuan against a basket of foreign currencies by diminishing the weighting of the dollar to 22.4% from 26.4% starting January 1.
“The move is aim to reduce the impact of dollar strength on the overall performance of the basket,” Christy Tan, head of markets strategy in Hong Kong at National Australia Bank Ltd, told Bloomberg. “It will also make it easier for China to manage yuan stability versus the basket, since the yuan will need to appreciate less versus other non-dollar currencies amid dollar strength.”
China is a major exporter and benefits from a weaker currency, but a quick decline in its currency could cause foreign investors to leave the market. The new yuan weight against a basket of foreign currencies better reflects it ties with its other trade partners.
“The new basket is more comprehensive and a better reflection of China’s trade relations,” Sim Moh Siong, a currency strategist at Bank of Singapore Ltd, told Bloomberg. “In the near term, the PBOC’s target would still be to keep the yuan stable versus the basket.”
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