Question: Given that the Chinese government appears to be acknowledging that mainland banks are lending too freely (witness the increase in reserves mandated recently, for the 2nd time already this year) plus the increasing likelihood of a modest revaluation of the Yuan vs. the dollar, it would seem to me that one could expect both a rise in Chinese bond rates AND an appreciation of their currency vs. the US dollar. Is there a low-fee method to place a small bet on such eventualities this year, or are these elements already priced into Chinese short-term bond funds? John, Minneapolis, MN
Answer: First of all, playing with currencies is pure speculation. It’s a bet, a gamble, and nothing more.
That’s why I much prefer investing in overseas companies with earnings, employees, and a business strategy. There are a number of ways to invest in Chinese companies, from China-only exchange traded funds and mutual funds to broader based Asian and emerging market index funds.
Second, the currency scenario you describe is the likely course with the Yuan compared to the dollar with time. But the timing of the move is uncertain. Tthe currency markets are in turmoil with the recent appreciation of the dollar (largely reflecting a flight to safety and an economic recovery) and the depreciation of the Euro (hammered by the sovereign debt crisis and slowing growth). It’s unclear how the nearly $1 trillion loan rescue package and central bank bond purchase program negotiated over the weekend by Europe’s leaders will work out–and what will be the effect on currencies.
Third, there is a deep divide among knowledgeable observers when it comes to China’s economy. Yes, there is little doubt that China’s long-term economic prospects are stellar. But short-term? The Chinese government is trying to cool off rampant real estate speculation and dampen down inflationary pressures. It could succeed or the bubble could burst. It’s a tough call.
That said, how could you speculate on changes in currency values? One way is through ETFs. For example, with the Wisdom Tree Dreyfus China Yuan Fund. It’s an exchange traded fund that seeks to earn an income off money market rates in China available to foreign investors and an exposure to changes in the Yuan relative to the dollar. The 1 year return is -2.24% and the 1 month return is -1.15%. Check it out by going to Bloomberg.com and type in the stock symbol CBY.
My guess is that much of the scenario you’ve sketched out is already priced into bond funds.
Remember, play like that are really no different than heading to the casino for the ordinary person. You’re up against very sohisticated investors that are in the market all the time. So, this should be nothing more entertainment money. Have fun.