2023-04-05 22:42:16 ET
Summary
- With China on the rebound, the WisdomTree Chinese Yuan Strategy Fund’s hassle-free Yuan exposure is worth considering.
- Key stress points from last year have been stabilizing, while the trade surplus also looks poised to widen alongside a tourism recovery.
- Amid heightened risks from the fallout of the US/Europe banking crisis, the Yuan could benefit from further portfolio inflows.
Despite emerging recovery signs in China’s macro fundamentals to start the year, the PBoC’s commitment to easing has driven a modest reversal of the CNY/USD. As the post-reopening growth gains momentum and flows through to corporate earnings, however, increased net equity inflows should boost the CNY. The tourism recovery is also at an early stage and should boost the trade surplus throughout the year. Further supporting the case for a stronger CNY is China’s largely state-backed banking system, which remains relatively insulated from the fallout of monetary tightening globally. Higher relative yields remain a potential source of downside, but with Chinese PMIs moving higher and the property market also recovering on the back of fiscal support, the PBoC’s rate cut runway is likely nearing an end. Net, adding exposure to the CNY via the WisdomTree Chinese Yuan Strategy Fund ( CYB ) seems like a prudent decision here.
Fund Overview – No-Hassle Exposure to Yuan-Denominated Money Market Rates
The US-listed Chinese Yuan Strategy Fund provides investors exposure to changes in the value of the Chinese Yuan via Yuan-related forward contracts and income from time deposits, as well as US money market collateral securities. The fund held ~$25m of total assets at the time of writing and charged a 0.5% expense ratio, making it a no-hassle (albeit fairly pricey) option for US investors looking for Yuan exposure. A summary of key facts about CYB is listed in the graphic below:
WisdomTree
The fund mainly gets its Yuan exposure via ten forward contracts, mostly backed by short-term Treasuries maturing in May (35.1%) and June (28.3%). A large chunk of the forward positions is in the CNY/USD pair, which at a market value of $21.6m at the time of writing, sits slightly below the contract value. The rest of the exposure is via in-the-money CNH/USD forwards (note CNH is the Yuan price in the offshore market), with a market value of $3.7m.
WisdomTree
On a YTD basis, the fund has risen by 1.1% and has annualized at a similar 1.4% pace in market price and NAV terms since its inception in 2008. Given the low effective duration at 0.1, the fund generally does not experience prolonged drawdowns, with declines like last year typically followed by subsequent moves higher. In line with this view, last year’s ~6% drawdown has driven yields higher than usual, with the average yield to maturity and trailing 30-day yield now up to ~4%.
WisdomTree
Latest RRR Cut Adds Impetus to the Post-Reopening Rebound
The size of the PBoC’s latest 25bps cut to reserve ratio requirements ((RRR)) wasn’t a surprise, but the timing was, given it came ahead of the scheduled policy meeting. The move was perhaps in reaction to economic indicators pointing to a slower post-reopening recovery than anticipated by authorities. The latest retail sales print, for instance, was up 3.5% YoY but remains short of the 'revenge spending' rebound many had hoped for following a series of strong services-led PMI data points. While China is still likely on track for a ~5% growth target for this year, monetary easing is a helpful tool to boost the growth impetus.
Bloomberg
It remains early days, though, and the stress points that weighed on the Chinese economy last year are already reversing, no doubt helped by the RRR cuts. Case in point - property sales accelerated in the Jan-Feb period across the primary and secondary markets, supported by transaction volumes moving significantly higher across key cities like Shenzhen and Chengdu. In effect, the latest data more than reverses the COVID and regulation-impacted property sales declines seen last year and bodes well for an investment-led recovery. So even if the domestic consumption recovery proves to be slower than expected amid slowing global growth, the rally in Chinese growth numbers likely still has legs. As more fiscal support, including the added liquidity for developers, comes through, expect a further boost to property values and, by extension, household wealth and consumption going forward.
Clear Path to Strengthening the Trade Surplus Position
On the current account side, China has also benefited from an upswing in net trade inflows, with its surplus position widening to a record high in February per customs data . A key driver of the improvement was higher exporter remittances and lower importer USD-denominated demand, both of which more than offset a continued tourism deficit. This leaves ample room for upside as the lagging post-COVID tourism recovery catches up over time. For now, China’s daily international flights remain well below pre-COVID levels, mainly due to the impact of income and wealth losses in recent years from the property market downturn. Yet, domestic markets are already rebounding this year, and as travel moves higher as a % of pre-COVID capacity, expect tailwinds from the improved trade balance to boost the CNY in the months ahead.
Bloomberg
Betting on a Cyclical Yuan Rebound
The continued recovery in China’s economic fundamentals hasn’t quite tracked the CNY/USD price action in recent months, as more RRR cuts widened the yield differential to developed markets. As the Fed hiking cycle enters its final innings, though, expectations of a relative outperformance across China assets should drive more foreign inflows and, by extension, CNY strength. Amid concerns about a bank liquidity crunch in US and Europe as well, the relative stability of the Chinese Yuan stands out, particularly with the Chinese administration pushing a growth-friendly agenda at its latest NPC meeting. Barring any geopolitical headwinds, adding low-cost exposure via CYB to either express a directional view or as a portfolio diversifier seems prudent.
For further details see:
CYB: Betting On A Cyclical Yuan Rebound