Across The Border | Stock Connects can act as perfect hedge against yuan’s fall
As closed-loops, the yuan-in, yuan-out system avoids capital flight, but helps hedge the depreciation risk of the currency
Mainland investors can hedge against the yuan’s depreciation through the Shanghai or Shenzhen Hong Kong Stock Connect scheme, which is one of very few channels still available to avoid asset shrinkage due to the weakening currency.
However, not all stocks can play the role, because China-asset backed stocks are still exposed to depreciation.
“If Chinese investors purely want to hedge against the yuan’s depreciation, they should consider real Hong Kong firms which do not have much onshore business,” said Aidan Yao, senior emerging Asia economist at AXA Investment Managers Asia.
China asset-backed stocks in Hong Kong, such as China Mobile or PetroChina Company, record earnings in yuan while their shares prices are denominated in the Hong Kong dollars, which are pegged to the US dollar at a narrow range of between 7.75 and 7.85 per US dollar.
If the yuan continues to fall against the greenback, the price-to-earnings (P/E) ratio of such stocks will become expensive and shares price may face a downside risk.
“Many mainland investors have home bias and prefer companies they are familiar with, but holding those stocks can’t help prevent them from the yuan’s depreciation,” Yao said.