Sell Yuan Forwards as Chinese Export Growth Slows, RBS Says

By Kim Kyoungwha

Nov. 12 (Bloomberg) -- Investors should sell 12-month yuan forwards and buy similar Hong Kong dollar contracts to profit from an expected slump in China's export growth, Royal Bank of Scotland Group Plc. said.

China's exports, which grew in October at the slowest pace in four months, will cool to less than 5 percent next year, a level unseen since 1999, strategist Ben Simpfendorfer in Hong Kong wrote in a report yesterday. Policy makers unveiled a $586 billion stimulus plan this week after the economy grew at the weakest pace in five years in the third quarter.

``The economy is slowing and the government is concerned,'' Simpfendorfer said. ``The size of the fiscal package underscores just how fast economic conditions have deteriorated. It is possible that an increasingly market-driven economy corrects faster than the fiscal package can be implemented.''

The prospect of slower growth is driving down yuan forwards at the same time Hong Kong dollar contracts are rising on expectations for a stronger U.S. dollar, to which the Hong Kong currency is pegged.

Non-deliverable forwards contracts, which show the yuan will weaken to 6.9150 versus the dollar in 12 months, declined 9.7 percent since touching a post-peg high of 6.2457 on March 13. Forwards are agreements in which assets are bought and sold at current prices for future delivery.

The Chinese currency fell 0.08 percent to 6.8308 a dollar in Shanghai as of 10:39 a.m., compared with 6.8251 yesterday, according to the China Foreign Exchange Trade System. The yuan has gained less than 0.4 percent since the end of June after a 6.6 percent appreciation in the first half.

Slowing Growth

China's economy grew 9 percent in the third quarter and its expansion next year may be 5 percent or less, the weakest in almost two decades, unless stimulus spending is implemented rapidly, according to RBS report. Exports climbed 19.2 percent in October from a year earlier after gaining 21.5 percent in September, the customs bureau said yesterday.

Hong Kong dollar forwards will rise further versus the greenback as the city's de facto central bank sells its own currency to prevent it rising beyond 7.75 per U.S. dollar, the upper limit of its peg, RBS said in the report.

Hong Kong would also benefit from capital flows out of mainland China in the event that the nation's economic growth slows to 5 percent next year, Simpfendorfer said.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net;