Nouriel Roubini's Bullish on the Chinese Yuan: Think Twice Before Buying It in ETF Form

By Matthew Hougan

Roubini, the NYU professor who forecast the current credit collapse, thinks that China's currency is ascendant.

He lays out his case in an op-ed in Thursday's New York Times.

"The 19th century was dominated by the British Empire, the 20^th century by the United States," he writes. "We may now be entering the Asian century, dominated by a rising China and its currency."

He goes on to suggest that the Chinese renminbi (aka yuan) could become the new reserve currency of the world over the next 10 years.

"Traditionally," he explains, "empires that hold the global reserve currency are ... net foreign creditors and net lenders. The British ... pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position."

He predicts doom and gloom for the greenback, and merriment for the yuan.

For ETF investors, that means one (or rather two) things: Buy CNY or CYB. Those are the Market Vectors - Renminbi/USD ETN (NYSE: CNY) and WisdomTree Dreyfus Chinese Yuan ETF (NYSE: CYB), respectively. Both offer 1-for-1 exposure to the value of the Chinese currency.

Sounds like a no-brainer, right?

Well, maybe. I hear investors talking about these products all the time, and I'm not sure everyone understands them.

The Chinese currency is not a free-floating currency. Rather, it's designed to trade at or around a basket of other currencies, dominated by the U.S. dollar, euro, Japanese yen and South Korean won. The Chinese government has, for the past few years, allowed its currency to appreciate ... some ... against the dollar. But for most of the past year, it's been stuck essentially at a peg to the U.S. dollar of 6.8 yuan per dollar.

Because of that peg, an investment in CYB or CNY has been markedly un-exciting. Since debuting about one year ago, it's gone up about 4% ... about what you'd get in a CD. And it's just about a flat line over that stretch.

Investing in China's currency sounds sexy, but the bet with these products is a long-term one. If you buy, you're betting that Nouriel Roubini is right, that the renminbi is ascendant, and that eventually China will be forced to further relax trading restrictions on its currency.

If that happens ... some might say when that happens ... the products could get very exciting indeed.

BTW: One note on Jim's blog regarding Claymore buying Rydex: I like the idea of someone buying Rydex, as that's an interesting franchise with some very interesting ETFs in it. The Rydex S&P 500 Equal-Weight ETF alone (NYSE: RSP) may be worth the price of admission, as a lot of advisers find it a useful way to move down the cap spectrum while sticking with ultra-liquid names.

Another interesting purchase would be a company like RevenueShares, whose products have turned in some tremendous performance recently and which are gaining some credence as core holdings. That's just idle speculation, though: There's not even a rumor about that in the marketplace.

I guess we'll see.

Comments

[max12345:]

When people from all over the world start trying to emigrate to China to live there permanently because they love the freedom there, or when Chinese rock and roll music is danced to in the discos of this world, maybe then I will buy lots of Chinese Yuan and sell short the U.S. dollar. Until then I am going to stick with the Greenback. (Sorry Nouriel if I don't follow your phenomenal logic)

The power of countries or of empires...the British Empire, the U.S. Empire....and the Chinese Empire that Mr. Roubini foresees and predicts for the future (he ranks right up there with Cassandra) is a very complex ongoing interplay of political, economic, social, cultural and military power and the related forces and influences ....that allow a country to run things either because people like it or because they are too afraid of it. In the case of China it's unlikely it will be able to muster up enough of either for at least another couple of centuries. And by then planet earth will be dead and buried due to the continuing environmental assault by the "human" race. And so I do rank right up there with Nouriel in terms of pessimism?

May 15 10:10 AM

[onebir:]

"Well, maybe. I hear investors talking about these products all the time, and I'm not sure everyone understands them."
I was hoping you'd explain them because, as you say:
"The Chinese currency is not a free-floating currency." and subject to exchange controls. It's illegal to take or wire it out of the country unless you're actually buying something.

So how can it be offered to investors?

May 15 11:45 AM

[Living4Divi...:]

The ETF buys bonds denominated in Yuan


On May 15 11:45 AM onebir wrote:

> "Well, maybe. I hear investors talking about these products all the
> time, and I'm not sure everyone understands them."
> I was hoping you'd explain them because, as you say:
> "The Chinese currency is not a free-floating currency." and subject
> to exchange controls. It's illegal to take or wire it out of the
> country unless you're actually buying something.
>
> So how can it be offered to investors?

May 15 12:52 PM

[User 142738:]

If these are bonds, why do they pay 0% interest? Are the expenses for these ETFs so high that any interest is canceled out?

May 15 02:32 PM

[HaavBline:]

If you really use immigration and musical trend as investment guides, you would be late by not just years but decades, so late that you may even luck out.

Decades after US took over from GB as the new empire of the world, Americans remain feeling inferior culturally to GB, until they won the cold war in the 80s. Just think about all those British rock groups, are they really that great?


On May 15 10:10 AM max12345 wrote:

> When people from all over the world start trying to emigrate to China
> to live there permanently because they love the freedom there, or
> when Chinese rock and roll music is danced to in the discos of this
> world, maybe then I will buy lots of Chinese Yuan and sell short
> the U.S. dollar. Until then I am going to stick with the Greenback.
> (Sorry Nouriel if I don't follow your phenomenal logic)
>
> The power of countries or of empires...the British Empire, the U.S.
> Empire....and the Chinese Empire that Mr. Roubini foresees and predicts
> for the future (he ranks right up there with Cassandra) is a very
> complex ongoing interplay of political, economic, social, cultural
> and military power and the related forces and influences ....that
> allow a country to run things either because people like it or because
> they are too afraid of it. In the case of China it's unlikely it
> will be able to muster up enough of either for at least another couple
> of centuries. And by then planet earth will be dead and buried due
> to the continuing environmental assault by the "human" race. And
> so I do rank right up there with Nouriel in terms of pessimism?

May 15 04:37 PM

[Dr. O:]

I like pieces of paper issued by governments that are creditors not debtors, lenders not borrowers, savers not spenders, that have lots of natural resources. However, in defense of my homeland, the good old USA, we offer some semblance of political stability and military might that makes us a "flight to safety." On the other hand, China, Canada, and Australia look pretty safe as well, lol.

May 15 07:21 PM

[Analyste de...:]

In 2008, I used both CYB & CNY (along with 6 other currency ETFs) in small allocations within a Strategic Model for small account investors. I switched between the ETN & ETF with availability - don't recommend either.

Why? For most investors (retail public), you're not compensated for the risk. Unless you're a gambler-trader, have an account in excess of $10m, or business hedges, there has been no other compelling reasons for practical & prudent allocations of niche currency plays in a diversified long-term/retirement-f... portfolio.

Based on 2008's performance, you're better off identifying bond or defensive equity ETFs for your downside protection - asset-allocators, don't waste time tracking the forex mkts for currency ETFs.

Honestly, I loved the idea too - then I discovered it wasn't worth my effort. If clients get excited your spot-on currency plays outperformed the money market by 150 bps, hey, knock yourself out.

Until (IF) the Dollar goes death-spiral, these plays are a drain.

May 15 10:05 PM

[TERN:]

Then the day that you'll invest in Yuan will be sooner than you think.
Not only Chinese people from all over the world are migrating to China because of the massive opportunities there and (yes) the economic freedom from a lot of socialist regulation and taxation that plagues the West, but also many non-Chinese are trying their luck and enjoying the upbeat mood.
You should take a look in Shanghai or Shenzhen and see for yourself.


On May 15 10:10 AM max12345 wrote:

> When people from all over the world start trying to emigrate to China
> to live there permanently because they love the freedom there, or
> when Chinese rock and roll music is danced to in the discos of this
> world, maybe then I will buy lots of Chinese Yuan and sell short
> the U.S. dollar. Until then I am going to stick with the Greenback.
> (Sorry Nouriel if I don't follow your phenomenal logic)
>
> The power of countries or of empires...the British Empire, the U.S.
> Empire....and the Chinese Empire that Mr. Roubini foresees and predicts
> for the future (he ranks right up there with Cassandra) is a very
> complex ongoing interplay of political, economic, social, cultural
> and military power and the related forces and influences ....that
> allow a country to run things either because people like it or because
> they are too afraid of it. In the case of China it's unlikely it
> will be able to muster up enough of either for at least another couple
> of centuries. And by then planet earth will be dead and buried due
> to the continuing environmental assault by the "human" race. And
> so I do rank right up there with Nouriel in terms of pessimism?

May 16 06:29 AM

[dcb:]

You are giving an emotional reply to a rational discussion.
You are making some valid points, but need to put them in a better context.
1) will the world make a reserve currency that is controlled by a dictatorship that isn't freely floating?


On May 15 10:10 AM max12345 wrote:

> When people from all over the world start trying to emigrate to China
> to live there permanently because they love the freedom there, or
> when Chinese rock and roll music is danced to in the discos of this
> world, maybe then I will buy lots of Chinese Yuan and sell short
> the U.S. dollar. Until then I am going to stick with the Greenback.
> (Sorry Nouriel if I don't follow your phenomenal logic)
>
> The power of countries or of empires...the British Empire, the U.S.
> Empire....and the Chinese Empire that Mr. Roubini foresees and predicts
> for the future (he ranks right up there with Cassandra) is a very
> complex ongoing interplay of political, economic, social, cultural
> and military power and the related forces and influences ....that
> allow a country to run things either because people like it or because
> they are too afraid of it. In the case of China it's unlikely it
> will be able to muster up enough of either for at least another couple
> of centuries. And by then planet earth will be dead and buried due
> to the continuing environmental assault by the "human" race. And
> so I do rank right up there with Nouriel in terms of pessimism?

May 16 09:57 AM

[dcb:]

I disagree, you have to follow forex to be able to trade stocks. in reality people buy stocks in foreign currencies, those must be exchanged, and that cases the currency you move into to rise. Hence, the currency markets represent global capital flows.

You have problems when countries actively manipulate currencies to keep them low. if you look at the outsize return of emerging ecomomies, and over the past 6 years you clearly see it is all reflected in currency movements. the emerging markets dropped the most when foreign investors brought their money home during the recent crisis. they had the biggest falls because they had the highest percentage of foreign investors. capitulation in these markets happened at the time of max foreign investor pull out. and the recent huge gains are based upon foreign inflows. from a global perspective there are no foreign stock markets, they are just foreign exchange markets in a sense.

Roubinni isn't a person I would listen too for investment advice. macro economists have little or no understanding of how the market works. one is primarily rational the other is primary emotional. the two take opposite ways of thinking very often and there are not very many people in the word that can combine the two.


On May 15 10:05 PM Analyste de Boston wrote:

> In 2008, I used both CYB & CNY (along with 6 other currency ETFs)
> in small allocations within a Strategic Model for small account investors.
> I switched between the ETN & ETF with availability - don't recommend
> either.
>
> Why? For most investors (retail public), you're not compensated
> for the risk. Unless you're a gambler-trader, have an account in
> excess of $10m, or business hedges, there has been no other compelling
> reasons for practical & prudent allocations of niche currency
> plays in a diversified long-term/retirement-f... portfolio.
>
> Based on 2008's performance, you're better off identifying bond or
> defensive equity ETFs for your downside protection - asset-allocators,
> don't waste time tracking the forex mkts for currency ETFs.
>
> Honestly, I loved the idea too - then I discovered it wasn't worth
> my effort. If clients get excited your spot-on currency plays outperformed
> the money market by 150 bps, hey, knock yourself out.
>
> Until (seekingalpha.com/symbo...) the Dollar goes death-spiral,
> these plays are a drain.

May 16 10:10 AM

[max12345:]

I am (very) glad that some of my deliberately provocatory statements further above succeeded in provoking at least a couple of folks.

But just to be a bit more serious now (but not too much)...I am not really all that crazy about U.S. rock and roll music....(though I did like the Beatles and the Rolling Stones once a lot )....(so Britannia probably does still RULE)....and it's also true that lots of people (it's about as big a country size-wise as the U.S.) are moving to China because of some of the real (or presumed) economic opportunities there.

But the comparison that someone above made of the bureaucracy and the self-serving "rules" and "laws" that apply (selectively and differentially) in China to those in the West only demonstrates a pathetic understanding of what is real democracy and real freedom not to mention real so called "rule of law". (China may one day get there, but it's definitely not there yet) (even with the countless faults of the Western democracies; and I accept that rule of law has come short in the U.S. but at least it mainly works in the Scandinavian social democracies)....(and I can only break out laughing when I hear some people say that China is heading towards being like a Scandinavian social democracy)....

And I am not saying this out of malice or out of the usual ignorance and prejudice regarding China. (and I add this now because there are always at least one or two Chinese readers who proudly rise to the defense of the motherland) (or is it the fatherland?)

I have been all over China from East to West and North to South. (not just to Shenzen or to Shanghai)....and not only to the bigger cities but to very many of the smaller cities and towns where one sees the real China (and the real local government mafiosi shaking down the real local people)

I think Chinese people are generally speaking very nice and I think
the government is -in some respects- also doing some good things for its people. But do I want to settle there? NO.

Of course there are people with all sorts of different tastes in this world and I accept that lots of people may LOVE to live there. (I prefer to live in places where I can "fully breathe the air of freedom day in and day out" and in China most of the air that one breathes is polluted) (both politically and socio-culturally as well as physically) (even though they tried to clean up both for a couple of weeks during the olympics)....(they would have had cleaner air all around if they had held them "on the roof of the world")

So the above is regarding the aspect of comparative "cultural attractiveness". Which now that I am writing a bit more seriously (though only marginally so since this is not necessarily the right forum for truly serious discussion) I accept that cultural attractiveness (or lack thereof) is not necessarily
central to which currency is going to be the reserve currency of THE WORLD. (though I would argue it plays a partial role)

As far as the Chinese Yuan replacing the U.S. dollar is concerned for global international economic or financial reasons....the likelihood of that is nevertheless close to zero (even if China is at least in the minds of some (above) the land of freedom and opportunity and lots of people go there to live "The Chinese Dream".....(and not the nightmare) ....at least until such time as the Chinese economy will be twice the size of that of the United States. (since the Europeans when push come to shove will continue to side with the Americans)

Right now U.S. GDP is about 15 trillion (and the EU's combined GDP is sixteen trillion) and China's (mostly by exporting to the United States) is about one of tenth of that.

So unless Mr. Roubini starts to print counterfeit dollars....(to dilute the real ones even more than the Fed is already managing to do)....we probably will not see THE ALMIGHTY YUAN take over from the ALMIGHTY DOLLAR.

Personally - if it only could work - I would much rather go back to either GOLD....or go forward ...to a proportional basket of ALL currencies. (including of course also the Zimbabwe dollar) (I definitely believe in full equality between peoples)

And so I do hope that by now both serious and less serious folks alike will be able to see the forest through the trees and the rational arguments through the humour (both of which I have tried to put forth) (life hardly ever serves up its dishes on a silver (or a golden) platter)....

Unless one is some sort of an emperor of course. And since I definitely AM NOT an emperor I still prefer to just try to have a good laugh on the cheap once in a while....(which I have no doubt I will be able to continue to manage even if the Yuan DOES become the World's reserve currency!

May 16 11:23 AM

[Analyste de...:]

>I disagree, you have to follow forex to be able to trade stocks. in reality people buy stocks in foreign currencies, those must be exchanged, and that cases the currency you move into to rise. Hence, the currency markets represent global capital flows.

I know what you mean, but you know I mean INVEST IN (not "trade"), right? Most "investors" aren't buying & selling shares of foreign stock - they're picking a diversified international mutual fund or ETF for a longer term than your illustration implies. Very, very, very few will be bothered with forex (its a given) - and unless you're exceptional (see above), its really NOT worth the effort to include currency ETFs in client portfolios. Beyond the extra due diligence, there may be additional liabilities that negate these niche investments altogether.

Overall, currency ETFs have a gimmicky feel. Caveat emptor!

May 16 11:45 AM