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China's Problem is an Opportunity for Traders

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China's yuan rose sharply, following an announcement by the Chinese Central Bank that inflation remained "high", according to a report by Bloomberg.

The CCB has been waging a battle against inflation for several months now. The annual inflation rate remains persistently above five percent (recent data showed the annual inflation rate at 5.3%), despite the tightening efforts by the CCB.

The Chinese have actively worked to keep the value of their currency somewhat fixed to the value of the U.S. dollar. Various economic commentators have argued that their currency peg is the reason for their inflation; as the Federal Reserve has expanded its balance sheet, the Chinese Central Bank has had to follow suit.

Emmanuel Ng, a currency strategist at Oversea-Chinese Banking Corp, stated, "The official commentary has been leaning towards expounding the benefits of yuan flexibility."

If the Chinese Central Bank lifts some of its restrictions on yuan conversion, the yuan may appreciate significantly against the U.S. dollar. Thus, the yuan could be rallying as traders anticipate that the CCB will do exactly that.

Traders anticipating a stronger yuan may wish to consider WisdomTree Dreyfus Chinese Yuan Fund (NYSE: CYB). CYB works to attempt to return a value corresponding to the strength of the yuan, and may do well if the yuan appreciates against the dollar.

Traders viewing persistent inflation as evidence of Chinese economic strength could also consider a broader play on China. PowerShares USX China Fund (NYSE: PGJ) may be a way for traders to get broader exposure to the Chinese economy.

 

Related Articles (CYB + PGJ)

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