The Right China ETFs For January...Maybe

Chinese equities started 2016 on an inauspicious note when stocks in Shanghai plunged seven percent during Monday's Asian, prompting the closure of equity markets in the world's second-largest economy.

That glum start to the new year would seem to indicate the right way for traders to play Chinese stocks right now is with an inverse exchange traded fund, such as the Direxion Daily CSI 300 China A Share Bear 1x Shares CHAD, an ETF frequently mentioned in this space throughout the latter half of last year.

Traders and investors willing to bet that Chinese stocks will rebound, particularly those trading on the mainland, also known as A-shares, can consider a pair of new ETFs. These ETFs are currency hedged funds, which could prove to be an efficacious way of playing a bounce in Chinese stocks at this time of the year. Those ETFs are the CSOP MSCI China A International Hedged Exchange Traded Fund CNHX and the Deutsche X-trackers CSI 300 China A-Shares Hedged Equity ASHX.

China's recently revealed, heavy-handed approach to managing the value of the yuan could make the ASHX a “right place, right time” ETF. That and there is some potentially positive seasonality at play as well.

“Yuan weakness in January is almost certain. That is simply a consequence of the Chinese New Year festival. The argument is that millions of Chinese tourists spend the 7-day public holiday overseas. As a result, that will boost demand for foreign currency, especially US dollars. In addition, Chinese individuals will get their first opportunity to draw down on their annual $50,000 foreign-exchange quota. The concern this year is that it will be drawn down more quickly given the recent ~5% devaluation and market expectations for the yuan to weaken further,” said Rareview Macro founder Neil Azous in a note out Sunday. 

ASHX ETF follows the CSI 300 USD Hedged Index, the currency-hedged equivalent of the widely followed CSI 300 Index, which is the Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF's ASHR underlying benchmark. ASHX follows a methodology that has become popular with some new currency-hedged ETFs in that the new fund has just one equity holding, in this case it is the unhedged ASHR, along with the currency-hedged overlay.

CNHX “aims to capture the performance of the investible domestic Chinese equity universe, including large-cap and mid-cap A-Share stocks listed on both the Shanghai Stock Exchange and the Shenzhen Stock Exchange while neutralizing exposure to the fluctuations of the RMB relative to the U.S. dollar,” said CSOP in a statement.

“January should pick up from where December left off –that is, further weakness in the USD/CNY. According to MNI, every year going back to 2011, USD/CNY dropped in the 31 days leading up to the Chinese New Year holiday, which falls in either January or February,” adds Azous.