WisdomTree’s yuan ETF is heating up as investors start making bets China’s currency is heading higher against the dollar for all kinds of reasons, the latest a couple of reports suggesting the Chinese government is ready to let its currency start rising again.

Trading volume in WisdomTree Dreyfus Chinese Yuan ETF (NYSEArca: CYB), the largest and most liquid exchange-traded product currently available, has been building in the past week as money managers have started taking money out of Chinese stocks they think are getting overvalued. They’re putting it elsewhere, such as currency ETFs, according to some traders.

“Volume of CYB was about 4 million shares yesterday,” said Paul Weisbruch, vice president of ETF sales and trading at Street One Financial, a King of Prussia, Pa., trading firm that concentrates on ETFs. “That’s about 10 times its normal volume. The price didn’t move around a whole lot, because it’s fairly liquid, but people have definitely been positioning themselves for something like this.”

Both the New York Times and the Financial Times, citing confidential sources, reported today that the Chinese government may announce a significant shift in its currency policy in the coming days, a move that could cause the Chinese yuan to rise in value against the dollar.

Weisbruch said he had been picking up higher-than-usual trading volumes on CYB in recent sessions, though that was before the reports on high-level talks between Chinese and U.S. officials came out. He attributed some of that to the view he’s been hearing from some money managers that Chinese stocks may be ready for a pullback.

“I think people are thinking two things: I want to get out of my China longs, and a way to preserve some of the gains I’ve made is to get into the currency and have that cushion the blow, if you will. Also it kind of gives them a bet on the revaluation,” Weisbruch said.

He said the iShares FTSE/Xinhua China 25 ETF (NYSEArca: FXI) had gone up more than 10 percent in four trading sessions before selling off yesterday, suggesting something of a zero-sum game playing out in the realm of China-focused ETFs.

He noted that the Market Vectors-Chinese Renminbi/USD ETN (NYSEArca: CNY) saw less trading action than CYB. WisdomTree’s CYB is by far the more popular, with more than $650 million in assets. CYB is trading at around $25.25, nearly flat on the week, while CNY has gained about 1 percent.

Chinese Intrigue

Reporting from Hong Kong using anonymous sources, the New York Times’ Keith Bradsher wrote:

“The Chinese government is set to announce a revision of its currency policy in the coming days that will allow greater variation in the value of its currency, combined with a small but immediate jump in its value against the dollar, people with knowledge of the consensus emerging in Beijing said Thursday.”

The Chinese government imposed a strict peg between the yuan (also known as the renminbi) and the U.S. dollar during the financial crisis as a way of helping Chinese exporters compete. As the global economy recovers, pressure is increasing on China to loosen that peg, which nearly all currency experts believe would cause the yuan to rise against the greenback.

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