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  • What additional matters do I need to pay attention to when I buy or sell a Gold ETF that is denominated and traded in renminbi?

    In addition to the various considerations, features and risks concerning Gold ETF in general as set out above, it is important for you to understand whether the manager of the renminbi Gold ETF will seek to hedge against the foreign exchange rate / currency movements between renminbi and US dollar. If you do not understand about such mechanism, you should seek professional advice before investing.

    Renminbi Gold ETF without any currency hedging strategy

    The base currency of a renminbi Gold ETF is renminbi but the London Gold Fixing Price is quoted in US dollar. So without any currency hedging, the performance of a renminbi Gold ETF will not only be affected by the gold price movements, but also the foreign exchange movements between renminbi and US dollar. This may result in the following scenarios:

    • If renminbi appreciates against the US dollar and the gold price remains unchanged, the NAV of the renminbi Gold ETF (in renminbi) will in fact fall. This also means that the return of the fund (calculated in renminbi terms) will be less than which it may otherwise be able to achieve if it were denominated in US dollar or HK dollar (which is currently pegged to the US dollar). So, you may suffer a loss in their investments in the renminbi Gold ETF.
    • If renminbi appreciates against the US dollar and even if the gold price increases, it is still possible that the NAV of the renminbi Gold ETF (in renminbi) may fall.

      This can be illustrated by a simplified example:
      Day 1
      Gold bar: 20,000 troy ounces
      Market price of gold: USD 1,700 / troy ounce
      Exchange rate: 1 USD = 6.30 RMB
      NAV of Renminbi Gold ETF: RMB214,200,000
      Number of units: 50,000
      NAV per unit: RMB4,284

      Day 2
      Scenario A - There is a 5% appreciation in renminbi against the USdollar while gold price and all other things remain unchanged
      Gold bar: 20,000 troy ounces
      Market price of gold: USD 1,700
      Exchange rate: 1 USD = 6.00 RMB
      NAV of Renminbi Gold ETF: RMB204,000,000
      Number of units: 50,000
      NAV per unit: RMB4,080 (i.e. RMB204 LESS than Day 1)

      Scenario B - There is a 5% appreciation in renminbi against the US dollarand gold price increases by 2%, all other things remain unchanged
      Gold bar: 20,000 troy ounces
      Market price of gold: USD 1,734
      Exchange rate: 1 USD = 6.00 RMB
      NAV of Renminbi Gold ETF: RMB208,080,000
      Number of units:50,000
      NAV per unit: RMB4,161.6 (i.e. RMB122.4 LESS than Day 1)

      Scenario C - There is a 5% appreciation in renminbi against the US dollarand gold price increases by 6%, all other things remain unchanged
      Gold bar: 20,000 troy ounces
      Market price of gold: USD 1,802
      Exchange rate: 1 USD = 6.00 RMB
      NAV of Renminbi Gold ETF: RMB216,240,000
      Number of units: 50,000
      NAV per unit: RMB4,324.8 (i.e. RMB40.8 MORE than Day 1)

    Renminbi Gold ETF with currency hedging strategy

    A renminbi Gold ETF may seek to track the performance of the London Gold Fixing Price with a currency hedging strategy against the movements between renminbi and US dollar as closely as possible (i.e. the performance of the renminbi Gold ETF will be primarily reflecting the fluctuations of the gold price). However,you should pay attention to the following risks:

    • Tracking error risk - The tracking error of the renminbi Gold ETF may be higher due to the costs of hedging which may be substantial.
    • Hedging risk- Despite the renminbi Gold ETF seeks to hedge its foreign exchange risk, there can be no guarantee that all such foreign exchange risk can be fully eliminated as hedging would unlikely be perfect and it is also subject to market fluctuations.
    • Counterparty risk- The fund manager may hedge the foreign exchange rate movements between renminbi and US dollar by using of a series of derivative instruments such as currency swaps with a swap counterparty. In the event of insolvency or default by the swap counterparty, the renminbi Gold ETF may suffer loss in value and the fund may be exposed to foreign exchange risk on an unhedged basis.
    • Currency risk upon conversion- If you are a non-renminbi based (e.g. Hong Kong) investor, even if the renminbi Gold ETF adopts a currency hedging strategy, you will still be subject to the currency risk between renminbi and your local non-renminbi currency upon conversion between the two currencies as set out below.

    Renminbi currency risk

    • Non-renminbi based (e.g. Hong Kong) investors may have to convert local non-renminbi currency into renminbi when investing in a renminbi Gold ETF. You may also have to convert the dividends and proceeds (received when selling or redeeming the units) back to your base currency. During these processes, you will be subject to currency risk between renminbi and your local non-renminbi currency. You will also incur currency conversion costs.
    • Like any currency, the exchange rate of renminbi may rise or fall. There is no guarantee that renminbi will not depreciate. Investment in a renminbi Gold ETF shall not be used to bet on the appreciation of renminbi.
    • Further, renminbi is not freely convertible currently and is subject to exchange controls and restrictions. If the availability of renminbi is disrupted, the operations of the fund will be affected and redemption proceeds may have to be made in a currency other than renminbi or the settlement in renminbi may be delayed.

    Offshore renminbi market risk

    • While both onshore renminbi (known as "CNY") and offshore renminbi (known as "CNH") represent the same currency, they are traded in different and separate markets which operate independently. CNY and CNH do not necessarily have the same exchange rate and their movements may not be in the same direction.
    • A renminbi Gold ETF listed in Hong Kong will typically be valued with reference to the CNH exchange rate rather than the CNY exchange rate and the performance of the renminbi Gold ETF (particularly where it has no currency hedging strategy) may not necessarily be affected in the same way or extent by the movements of CNH against US dollar as the movements of CNY against US dollar.

    Renminbi trading risk

    • Liquidity risk - The liquidity and trading price of the units of a renminbi Gold ETF may be adversely affected given the limited availability of renminbi outside mainland China and the restrictions on the conversion of foreign currency into renminbi. Therefore, you may not be able to sell renminbi units on a timely basis, or you may have to sell your units at a deep discount to the net asset value.
    • Market maker risk - Market makers may not be as interested in making a market in units denominated in renminbi. Any disruption to the availability of renminbi may adversely affect the capability of market makers in providing liquidity for the units of renminbi Gold ETF. The liquidity of the fund may be adversely affected if there is no market maker for the fund.
  • I have already had securities account set up with my bank / brokerage to trade stocks and ETF, what more will I need to do if I would like to trade renminbi denominated ETF?

    Please click here to read relevant article on this website to learn more about what investors should do when trading listed renminbi-denominated securities.

  • I understand that Hong Kong Exchanges and Clearing Limited has launched the Renminbi Equity Trading Support Facility (TSF) to enable investors who have insufficient renminbi to buy renminbi-traded shares. Can I use this facility to buy renminbi Gold ETF?

    Currently, the TSF only supports secondary trading of renminbi-traded shares, exchange traded funds (ETFs) with equities as underlying and real estate investment trusts (REITs). Therefore, you cannot use the facility to buy renminbi Gold ETF.