DWS isolates yuan appreciation in forthcoming China bond fund

DWS has installed a mechanism in its forthcoming DWS Invest China Bonds fund, to allow euro-based investors to profit uninterrupted from moves between the renminbi and US dollar.

In a sign of how strongly people view the prospects of China’s renminbi, DWS said it estimated double the annual returns – 5% – from such movements, as from the current 2.5% yield of a typical portfolio of high grade yuan bonds.

Many practitioners, DWS included, expect the yuan to appreciate versus the US dollar after Beijing has loosened the tie it put in place between the two tenders back in 2005.

Since then it has already added 23% in value.

DWS said: “In addition to the bond yields, of about 2.5% a year as at August, investors should participate in the expected appreciation of China’s currency versus the US dollar.”

Estimates vary widely on just how cheap China’s tender is versus America’s, from between 12% and 50%.

DWS said: “The attraction of the renminbi bonds comes in particular from the undervalued Chinese currency,” said Philip Meier from DWS’s emerging markets team working on the product.

In some share classes of the fund, the euro will be fixed against the dollar “so that a weaker US currency in principal would hardly diminish the appreciation of the renminbi versus the US dollar”.

DWS said: “Investors who calculate and live in euros can profit to a large extent without euro/US dollar risk from an appreciation of the renminbi versus the US dollar.” DWS added the cost of the hedging required was “comparably negligible”.

The German manager noted its new fund gives investors the opportunity, now also via fixed income, “to profit from the economic power of China”.

The paper in the fund is expected to come from Chinese issuers in renminbi, or issues covered by renminbi, or denominated in renminbi but issued by foreign entities. The main focus of the portfolio will be on investment grade issuers.

DWS’s Invest China Bonds fund will invest in between 25 and 50 high quality issues of mid-range maturity.

Chinese businesses operational worldwide, and Beijing, provided already bonds valued at about 200bn renminbi. Since July 2010 investors have been able to invest in renminbi-denominated bonds, but DWS said China’s fixed income market had been previously difficult to access by foreign investors, due to thin markets and strict regulation.

But DWS added: “The Chinese government is resolutely pursuing a strategy of internationalising the renminbi, and to this end has a growing interest in caring for and growing the offshore bond market.

Liquidity has come with greater demand, DWS said.

In producing its fund, the Frankfurt-headquartered asset manager will be assisted by Harvest, the second largest Chinese asset manager by assets managed. It is a Chinese equity and fixed income specialist in which DWS owns a stake.

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