China: Potential for Currency Appreciation as Economic Engine Revs Back Up

Chief Investment Officer, Fixed Income and Model Portfolios

02/19/2013

For 2013, many market strategists believe that a potential catalyst for investment in China is set to occur in March, once the official leadership transition is complete. The upbeat economic data coming out of China has resulted in a surge of investor confidence. Additionally, many currency forecasters are now anticipating a nearly 2% rise of the Chinese yuan by the end of 2013.¹ Fears of a “hard landing” in China have largely dissipated, and economists and traders are refocusing on the positive impact that stronger Chinese growth could have on the region. Should the yuan rise by 2% in 2013, we believe the WisdomTree Chinese Yuan Fund (CYB) has the potential for strong returns.

As we have noted previously, the market for accessing the Chinese yuan is continuing to evolve. As a result, the WisdomTree Chinese Yuan Fund has evolved as well, given its status as the only actively managed Chinese yuan exchange-traded fund (ETF). Over the previous 12 months, we believe changes in the expectations of yuan appreciation have created greater opportunities for investors in the market. As a result, investors have received returns in excess of those attributed to changes in the spot currency rate. Put another way, investors have been paid nearly 0.98% since January 2012 for waiting on potential yuan appreciation.

(For standardized performance, including the SEC 30-day yield for CYB click here.) While it is far from certain if these interest rates will persist, we believe that the flexibility offered in the quickly growing market for Chinese yuan-denominated assets could continue. Should China continue to surprise to the upside, we believe this could potentially have a positive effect on other emerging market assets, especially among China’s regional trading partners. A principal investment theme for the WisdomTree Asia Local Debt Fund (ALD) is that with rebounding economic growth in China, we believe that many ASEAN countries along with Australia and New Zealand could see their economies benefit through regional trade as well. With growth in the emerging markets strong, we believe risk assets could continue their positive momentum, resulting in gains for investors in the WisdomTree Emerging Markets Local Debt Fund (ELD) and the WisdomTree Emerging Currency Fund (CEW). With continued progress in China, the “Year of the Snake” could prove to be a great year for the Chinese economy as well as for investors with exposure to the emerging markets at large. ¹Source: Bloomberg 2013.

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