The Case For Renminbi And FXCH

December 20, 2011



Chinese Slowdown

So what's possibly behind the lack of investor interest in FXCH so far?

For starters, the timing of the fund's launch might be a factor. There's currently a negative vibe brewing with any Chinese asset, due to weaker economic data coming out of China, signaling slower growth ahead.

"While we have heard and seen a lot of interest from advisors, the assets have been slow to follow. We believe that this is due in part to apprehension about the China government, and the 'true' growth in the economy," Tony Davidow, managing director at Rydex, said recently in a phone interview.

Indeed, export growth in China is slumping to levels not seen since 2009, which might lessen any incentive for Chinese authorities to accelerate currency appreciation.

Inflation has also recently slowed, taking some pressure off Chinese authorities to use currency appreciation to fight inflation. Adding to these fears is the European debt crisis and the U.S. Senate recently passing a bill threatening to label China as a currency manipulator and impose punishments.

Interestingly, the renminbi is recently showing some signs of weakness.

The Wall Street Journal published a story on this topic a few days ago. In fact, the renminbi nondeliverable forward markets are now pricing in a near-term depreciation in the currency, while CNH is trading at a discount to CNY.

But even if China's growth significantly slows, does that mean that we'll see a large depreciation in the renminbi against the dollar? Perhaps, but not a certainty either.

The huge factor at play here is that China's currency is tightly controlled.


In fact, if you look at currency returns since the summer when market volatility spiked, the renminbi has been one of the most stable currencies, especially compared with currencies of emerging and commodity-producing nations, which are highly affected by shifts in the risk-on and risk-off trades.

Currency Returns Vs. The U.S. Dollar
Since Aug. 1, 2011
Renminbi Onshore (CNY) 0.96%
Renminbi Offshore (CNH) 0.26%
Canadian Dollar -7.90%
Euro -8.90%
Australian Dollar -9.50%
Brazilian Real -17%
Swiss Franc -18%
As of 12/14/11


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