Playing the Chinese Yuan Battle With ETFs

Includes: CNY, CYB
by: Tom Lydon

It’s old news that many U.S. economists view the Chinese currency as undervalued by as much as 40%. Treasury Secretary Timothy Geithner is encouraging the country to return to a flexible exchange rate. If China acquiesces, two exchange traded funds can provide a way to get in on the action.

Although the U.S. government will continue to press the Chinese to reassess their currency, Geithner announced that ultimately, it will be up to the Chinese to decide whether a more flexible yuan will be beneficial, reports David Lawder and Kevin Yao of Reuters. Geithner had to choose his words carefully, because the issue is a sensitive one.

“I am confident that China will decide it’s in their interest to resume the move to a more flexible exchange rate that they began some years ago and suspended in the midst of the crisis,” Geithner said. [Play the Yuan's Fortunes With These ETFs.]

Geithner also announced that he would delay a report on China’s currency policies and instead, work with the Group of 20 to press for more flexible exchange rates.

This week, Geithner is in China to head off any confrontation on the issue.

So far, the Chinese government has denied any charges that it manipulates its currency to boost exports at the expense of American jobs and claims that the U.S.-China trade deficit is not due to the prevailing exchange rate. [5 ETFs for a Google-Less China.]

“The renminbi exchange rate is not the main reason behind the U.S.-China trade deficit,” Foreign Ministry spokeswoman Jiang Yu said. “So naturally, renminbi appreciation is not the solution to rebalance Sino-U.S. trade.”

But the Chinese government does recognize that it may need to enact fiscal policies to curb inflation and help promote domestic demand. As a result, futures are pricing in a 3% appreciation of the yuan against the dollar this year.

For more information on the yuan, visit our Chinese yuan category. Or take a look at our ETF currency report.

  • WisdomTree Dreyfus Chinese Yuan Fund ETF (NYSEARCA:CYB). CYB tries to produce the total returns reflective of both money market rates in China that is available to foreign investors and change in value of the yuan versus the U.S. dollar. The fund is not a “money market” fund, but it does invest in short-term, investment-grade instruments.

  • Market Vectors Renminbi/USD ETN (NYSEARCA:CNY). CNY is an exchange traded note (ETN) that delivers exposure to the exchange rate of foreign currencies. The fund tries to reflect the performance of the S&P Chinese Renminbi Total Return Index.

Sumin Kim contributed to this article.