By Wes Goodman and Kim Kyoungwha
Aug. 11 (Bloomberg) -- Just as the Bush administration prepares to take a bow for persuading China to let the yuan strengthen 18 percent against the dollar over the past three years, the gains are grinding to a halt.
The yuan retreated in the last two weeks after government officials said supporting growth is as important as fighting inflation. That raised speculation that currency policy will be adjusted to bolster exports as the trade surplus shrinks. Legg Mason Inc.'s Western Asset Management Co. is trimming bets on the yuan after it rose in July by the smallest amount in a year.
``Exporters are crying,'' said Rajeev De Mello, head of Asian bonds in the Singapore office of Western Asset, which manages $600 billion. ``There's a slowing in the economy. There will be less and less appreciation in the currency.''
The yuan slid 0.1 percent to 6.8653 per dollar as of 10:50 a.m. in Shanghai, near a six-week low. It fell 0.24 percent last week, after a 0.34 percent drop in the previous five days that was the biggest since the government ended the currency's peg to the dollar in July 2005. The People's Bank of China has kept the yuan little changed since June, after gains of 4.1 percent in the first quarter and 2.3 percent in the second.
U.S. Treasury Secretary Henry Paulson, writing this month on the Web site of Foreign Affairs magazine, said yuan strengthening still has ``much further to go.'' Of the advance since the peg ended, Paulson said 70 percent has come about since he initiated semiannual economic talks with China in 2006.
Global Slowdown
China is reining in yuan appreciation to help exporters weather a global slowdown and deter so-called hot money, speculative funds attracted by anticipated gains in the currency. Figures due this week will show exports grew in July at the slowest pace since February and the trade surplus shrank for a fourth month, according to economists surveyed by Bloomberg.
``For the next three to six months we could see a weaker yuan,'' said Phillip Blackwood, head of the emerging-markets division of Sydbank A/S, Denmark's third-largest bank by market value. ``The slowdown is spreading to China.''
The currency may fall as much as 2 percent, Blackwood said. He oversees $5 billion of emerging-market bonds for the bank in Aabenraa, 25 kilometers (15.5 miles) north of the Danish-German border. Blackwood would consider buying if the currency falls ``a couple'' of percentage points, he said.
More Gains Coming
It's too soon to start betting on the dollar rising against the yuan, Goldman, Sachs & Co. told clients last week.
``It would be the wrong decision to close long yuan exposure at these levels,'' Thomas Stolper, a London-based strategist at the world's biggest securities firm by market value, wrote in an Aug. 5 research note. China's yuan is likely to appreciate versus the dollar ``almost three times as fast'' as traders predict because money flowing into the country is still increasing, Stolper said.
China's economy, the world's fourth largest, expanded 10.1 percent in the second quarter from a year earlier. While that is the slowest pace since 2005, it's still the fastest among the world's 20 biggest economies.
The yuan is likely to strengthen 3.6 percent to 6.63 in the second half of the year, according to the median estimate of 25 analysts surveyed by Bloomberg.
Less Appreciation
So-called non-deliverable forward contracts indicate investors have been scaling back bets on currency gains. They suggest the yuan will reach 6.6095 per dollar in the next 12 months, an advance of 3.9 percent from the current exchange rate.
Two weeks ago the contracts, which allow traders to bet on the future value of China's currency, predicted an advance of 5.3 percent. At the start of last month, they priced in a 6 percent rise.
Forwards are agreements to buy and sell assets at current prices for delivery at a specified time and date. Non- deliverable contracts are used for currencies that can't be freely converted and are settled in dollars.
China let the yuan strengthen against the dollar for the first time in a decade after mounting criticism from the U.S. and Europe that the nation had an unfair trade advantage. The U.S. trade deficit with China ballooned to a record $256 billion last year, equivalent to about a 10th of the Asian nation's gross domestic product.
The central bank manages the yuan against a basket of currencies by setting a daily reference rate versus the dollar. China's currency can fluctuate 0.5 percent on either side. The bank today lowered the rate for the ninth time in a row, the longest run of reductions since the peg ended.
Growing `Headwinds'
Chinese President Hu Jintao cautioned this month against overestimating the benefits to the economy of the Beijing Olympic Games. He also said maintaining steady and fast expansion, while controlling inflation, is a priority.
New York-based JPMorgan Chase & Co., the world's sixth- biggest currency trader, on Aug. 1 advised investors to close bets that the yuan will be higher in three months. It cited ``increasing growth headwinds'' for the economy. Singapore-based currency strategists Claudio Piron and Yen Ping Ho had recommended the position just 12 weeks earlier.
``There's no opportunity to make money on the yuan revaluation,'' said V. Anantha-Nageswaran, head of investment research for Asia and the Middle East at Bank Julius Baer (Singapore) Ltd., part of Switzerland's biggest independent money manager.
Paulson's Visits
A retreat in the Chinese currency may take the shine off Paulson's successes in the run-up to the November election, after which President George W. Bush and his cabinet will step down.
The Treasury chief, who says he has visited China more than 70 times, will leave behind the worst housing slump since the Great Depression and an economy that may be shrinking.
Yuan gains won't help the U.S., said Zuo Xiaolei, chief economist in Beijing at China Galaxy Securities Co., the nation's biggest brokerage.
``The U.S. has no reason or justification to push for further appreciation,'' he said. ``The U.S. needs money to clean up the collapse of its housing market and that will require a stronger dollar to lure back investors.''
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.
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