Hi guys,
After watching Ray Dalio’s Changing World Order (here) I thought it qould be prudent to have some exposure to the Chinese market in case the Yuan does become the world’s reserve currency. I can’t see anyway to trade against the US Dollar directly but noticed there are a few options on Freetrade Plus. Does anyone have any insight whether China Growth, China Growth and Income or China Large Cap would be the best option?
Many thanks,
Don’t change your entire investing strategy because you warched a video online. Having some China exposure is good for diversification and I own one ETF that provides me that.
But doing things like shorting the dollar or moving your entire portfolio to Chinese equities is just not a very smart decision in the long run.
Thanks Georgi. I was thinking a 10% allocation of my total stock holding would be a reasonable amount. Which of the three choices I suggested most closely matches your ETF?
I’m personally using Vanguard emerging markets fund- VFEM. It has 0.22% ongoing charge, which is quite reasonable for a fund with stocks traded all over the world.
It is diversified across many markets with biggest being China, Taiwan and India. I don’t think it’s been performing great tbf, but I have it mostly for diversification purposes with 5% of my portfolio.
If you are thinking of going for any ETF, I advice you to go through their prospectus, see what stocks they hold, how much is their ongoing fee per year and make a decision about yourself.
But as I said, don’t jump quickly to conclusions just because you’ve seen something online.
It is highly unlikely that the Yuan will ever become the world’s currency. Not in our lifetime anyway.
The Yuan lacks stability, is not transparent, is too tightly controlled by the Chinese government and simply US would never agree to such an undertaking.
An investor could never invest in China and still be successful. I am not saying China doesn’t have a place but it should be extremely small.
EDIT: I am aware that there are eight IMF reserve currencies. I am referring to the top spot in the first paragraph.
Exactly, Until it is free-floating it cannot be reserve currency in my eyes
Under the Managed Floating Exchange Rate, the exchange rate is determined by a basket of currency, and it also allows the yuan to appreciate by 2.1% against the dollar . However, the practical rationalization for how it is determined remains unclear to the public
I’m curious to hear people’s opinions as to what discount Chinese stocks should trade at vs Western stocks, if any, to account for the political risk of the CCP interfering with the business, demanding books be cooked, having long term plans being derailed, western investors having their funds frozen (as aptly demonstrated by Russia recently) etc.
I personally consider China un-investable at the moment.
Has a world reserve currency ever changed with a country’s “permission”?
Purely taking into account Earnings, ROIC and Historical levels we could say a P/E of 14, P/B of 1.8. So perhaps it’s currently fair value. I’m assuming political risks have not changed significantly over the last 10 years
Edit: Sorry this is for EM as a whole. I would personally not hold a single country allocation to China. I think the risks are better perceived in the context of all Emerging Markets
Yes it has. The reserve currency was Pound sterling prior to the US dollar and Britain agreed to this at the Bretton Woods conference
fair point. however we could quibble over “agreed” but i take your point.
i think i’ll move the goalposts and say this situation is more akin to older situations where it wasn’t so smooth.
The IMF approved the Yuan as a reserve currency a while ago:
Yes but the yuan’s share is a mere 2.5% of official foreign exchange reserves
its all about trust. the chinese dont make it easy. The USA does. Thats the key to a global network (dollar)
Thanks for confirming it is already an IMF recognised reserve currency.
To your initial question, you can use either an ETF or investment trust depending on whether you want passive or active exposure. The justETF link below’s a good guide to the ETF options and you can compare the investment trusts here.
I favour an active approach for emerging markets but I don’t hold any China-specific funds. I figure I already have enough exposure through other holdings such as PHI.
Excellent point. Another good example of this SMT - it provides exposure to China (and correspondingly this has contributed heavily to the decline in share price over the past few months).
Alongside the Euro, Japanese yen, British pound, the Swiss franc, Canadian dollar and the Australian dollar
I guess I (mis)interpreted the question as it taking over the USD as the most powerful reserve currency
Yeah, I hold SMT too. Thankfully, I sold BCGC and reined in my China/Baillie Gifford exposure in early 2021. In my experience, it pays to be mindful of your underlying exposure to different countries, regions, individual stocks, industries/sectors, investment styles and fund managers.
Morningstar’s X-ray tool is useful although I’ve found it annoyingly buggy: