The onshore Chinese currency’s Sharpe ratio — a measure of returns adjusted for price swings — against the Hong Kong dollar was 7 in the past three months, the highest among Asian exchange rates. The offshore yuan’s ratio was 4.7, the third highest, according to data compiled by Bloomberg. This suggests the yuan offers the some of the best carry trade opportunities against the Hong Kong exchange rate in Asia.
Another lure for investors to switch to the yuan is the chance of buying onshore assets, a process helped by China’s new bond-trading link with Hong Kong. The yield on 10-year Chinese government bonds is at 3.63 percent, compared with 1.61 percent on Hong Kong debt of the same tenor.
“This type of yield arbitrage is in play right now, and it’s very favorable for flows to go that way — to bonds, yuan and even some of the undervalued equity plays,” said Stephen Innes, Head of Trading at Oanda Corp Asia . He said the switch is being made by a mix of regional high net worth clients, and home-office and smaller institutional clients. “The market is going to be so much larger on the mainland — the party only has started.”
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.