The Daily Update: Soros Warning / Renminbi Bond Fund

We wrote a couple of weeks ago about how BlackRock’s research unit now believes China should no longer be thought of as an emerging market, believing it was ‘time to treat China as an investment destination separate from emerging and developed markets’ and recommended that investors boost their exposure to the country by as much as 300%. However, one person who is not singing from that hymn sheet is none other than George Soros.

In an opinion article in the Wall Street Journal, Soros believes BlackRock’s push into China is not only a risk to clients’ money but also to U.S. security interests. ‘Pouring billions of dollars into China now is a tragic mistake’ Soros wrote, adding ‘It is likely to lose money for BlackRock’s clients and, more important, will damage the national security interests of the U.S. and other democracies’.

This is not the first time George Soros has written warning against closer ties to China. He believes not only should investors be worried about the ongoing wave of market-roiling crackdowns, but has also denounced Xi Jinping’s China as ‘the most dangerous enemy of open societies in the world’.

The differing views of these two 800-pound gorilla money managers underlines the problems confronting financial firms in the world’s second largest economy. While China has indeed made it easier for foreign companies and investors to participate in domestic markets, the Xi government is also tightening its grip on the private sector and clashing with the U.S. on everything from Hong Kong to cybersecurity.

However, there is a way in which you can have your cake and eat it when it comes to China. It’s called the Renminbi Bond fund (RBF). As we have mentioned (many) times before there is no need for investors to expose themselves to risks if the primary driver of returns is in fact the currency rather than anything else. RBF invests in the credits of the world’s wealthiest and least indebted nations, economies whose net foreign assets dwarf that of most developed nations, then have an overlay of CNH. So, you buy the likes of USD AA rated pan-Asian sovereign issuance and then overlay with CNH you get a high-quality investment grade bond at a yield of over 3% plus another 3% yield with the currency overlay, with potential for capital gains on the bonds.

Since the fund was launched in 2007, it has an annualised return of 8.66%. (Stratton Street Renminbi Bond Fund Class A USD since inception as of 31 July 2021.)

If you would like further details please do not hesitate to ask.

Have a good day.