Over the past few weeks, the Chinese Renminbi has been falling in value against the dollar. It has lost 0.8 percent of its value in the past month, and as a result, we are seeing analysts and reporters making bold implications. For instance, CNBC’s Ansuya Harjani published an article suggesting that the recent decline in the Yuan might mean the beginning of a policy shift in China.
Indeed, it looks as though there is a policy shift. Despite the fact that the move in the Yuan’s value vis-à-vis the Dollar is minimal, relative to its past price action a 0.8 percent decline in a month is significant. This is the case because the Yuan is a managed currency — the People’s Bank of China (PBoC) regulates the supply of Yuan in the market so that it achieves a certain price, and so, the weakness is intentional.
While there can be several reasons that PBoC officials would want the Yuan to depreciate, I think the answer appears in Harjani’s article. As FX expert Mitul Kotecha of Credit Agricole suggests, speculators have had an extremely easy trade in buying the Yuan against the Dollar — it has essentially risen in a straight line with minimal corrections. This price action drew in more foreign speculators who felt confident in leveraging up this trade.
While these speculators may be right, on a fundamental basis, the fact remains that no market — no matter how undervalued — goes without corrections and pullbacks. A correction has been overdue in the Yuan for a while, and now it is here. In all likelihood, this pullback is going to force more speculators out of the Yuan trade, and while the Yuan is a controlled currency, PBoC officials will let it fall further in order to dissuade speculators from bidding up the Chinese currency’s price.
Once we see more headlines indicating further bearish price action in the Yuan and headlines insinuating that PBoC officials want a weaker Yuan, the bull market will be ready for another leg higher. This continued bullish price action will follow from the ongoing growth of demand for the Yuan outside of China. This is being spurred by the growth in Yuan-based bilateral trade agreements between China and foreign nations including Japan, Brazil, and Australia. It is also the result of the Yuan being used by other nations such as Zimbabwe, as its currency collapsed in value during the financial crisis in 2008 – 2009.
While the PBoC can prevent the Yuan in rising in value for a short period of time by increasing the supply short-term and scaring away the bullish speculators, the bullish fundamentals are unstoppable, and the Yuan’s importance and usage on the global economic stage will continue for many years and decades. Therefore, investors should consider taking a bullish position in the Yuan in the near future. This isn’t necessarily easy for most American investors. There are ETFs that track the Yuan’s value such as the WisdomTree Chinese Yuan Fund (CYB), however, this fund is illiquid and it is therefore not suitable for all investors.
Investors can also consider buying Chinese stocks that generate a lot of cash flow in China. If a company is generating cash flow consistently and the Yuan appreciates, then the profits and dividends from such companies will appreciate as well. However, investors need to be careful in selecting Chinese companies, and they must bear in mind that the exposure they are getting isn’t simple currency exposure. For instance, if there is deflation in China, then that will mean that the Yuan will gain in value but that Chinese companies will earn less money.
The best option is for investors to open a Chinese bank account. This is relatively easy to do through the Bank of China’s New York branch. This option allows for people to get direct Yuan exposure, earn a little interest, and avoid ETF expenses or the risks inherent in stock market investing.