By Judy Chen and Wes Goodman
Dec. 5 (Bloomberg) -- The yuan’s record decline is attracting global money managers betting the drop will prove fleeting as China spends $586 billion to boost domestic demand.
Union Investment is purchasing contracts linked to the future value of the yuan, predicting China won’t let it depreciate and cause currencies across Asia to decline further. Fortis Investments, part of the Belgian financial services company, forecasts a gain of as much as 3 percent in the coming year, even as forward contracts price in a drop of 6 percent. The currency slid 0.72 percent on Dec. 1, the most since the central bank ended a fixed exchange rate in 2005.
“Depreciation would have a significant negative impact on other Asian currencies due to the heavy regional linkage between Asian countries and China,” said Sergey Dergachev, an emerging- market money manager at Union Investment in Frankfurt, which has $233 billion in assets. “I don’t think it will materialize.”
China is still “committed” to appreciation of the yuan over the medium-to-long term, U.S. officials told reporters yesterday in Beijing after Treasury Secretary Henry Paulson met his Chinese counterpart, Vice Premier Wang Qishan. The officials couldn’t be identified under the rules of the briefing. The yuan’s slump on Dec. 1 had prompted Morgan Stanley to predict more declines.
Beijing Talks
A weaker yuan may be seen as a rebuff to Paulson, who is in Beijing to convince Chinese officials that they should let the currency strengthen.
Paulson again called for a stronger yuan on Dec. 2, urging China to boost domestic consumption rather than rely on exports to strengthen its economy. The yuan’s 0.6 percent drop this week has wiped out almost all gains achieved since the two governments last convened a meeting of their biannual economic talks in June.
The currency strengthened as much as 0.21 percent today, after Commerce Minister Chen Deming said yesterday that China is “not counting on” depreciation to help exporters. The nation will keep the yuan stable and better manage market expectations, Deputy Finance Minister Zhu Guangyao said as talks ended today.
The yuan climbed 0.07 percent to 6.8767 per dollar as of 11:16 a.m., from 6.8817 yesterday, according to China Foreign Exchange System. Dergachev predicts a rate of 6.87 over the next six months, delivering a profit for buyers of forward contracts.
As a managed currency, China kept the yuan little changed after the collapse of Lehman Brothers Holdings Inc. on Sept. 15 caused investors to hoard dollars and dump emerging market currencies. South Korea’s won plunged 25 percent between the failure and Nov. 28, the Brazilian real slumped 22 percent and Russia’s ruble fell 8 percent, as the yuan gained 0.15 percent.
‘Considerable Opposition’
Non-deliverable forwards, which fell by a record 3.3 percent on Dec. 1, signal the yuan will decline to 7.3025 in 12 months. Forwards are agreements in which assets are bought and sold at current prices for settlement at a later time. Non- deliverable contracts are settled in dollars.
“Any attempt to devalue the currency is likely to be met with considerable opposition from China’s trading partners,” said Simon Godfrey, who helps oversee the equivalent of $264 billion as a senior investment specialist at Fortis Investments in Hong Kong. The new U.S. administration under President-elect Barack Obama “will be less tolerant of the ‘crawling peg’ appreciation policy,” he said.
Taiwan shipped 36 percent of its exports to China last year, South Korea 25 percent and Japan 19 percent, according to UBS estimates. Companies such as Lenovo Group Ltd., China’s biggest computer maker, compete with Asian rivals including Tokyo-based Sony Corp. for sales in the U.S. and Europe.
Lower Rates
China cut interest rates by the most in 11 years and announced a $586 billion economic stimulus plan last month to spur domestic demand. Global stocks and currencies rallied after the moves on optimism the world’s fourth-biggest economy would remain a primary destination for exports.
The International Monetary Fund said Nov. 24 that China’s economy, the biggest contributor to global expansion, will grow 8.5 percent in 2009, as the Asia-Pacific region slows to 4.9 percent. The IMF predicted the U.S. economy will shrink 0.7 percent and Europe’s 0.5 percent.
The decline prompted Morgan Stanley, the New York-based bank holding company, to abandon a forecast for no depreciation. China’s yuan may weaken as much as 10 percent amid “rapidly rising manufacturing unemployment,” Stephen Jen, global head of currency research in London, wrote in a Dec. 2 report to clients.
“Depreciation is possible,” said Chris Ruffle, who helps oversee about $3 billion of assets as co-chairman of Martin Currie Investment Management Ltd.’s China unit in Shanghai. “The export number will turn quite ugly, and the government will come under a lot of pressure.”
‘Can’t Go On’
Export growth probably cooled to 15 percent in November, the slowest pace in nine months, from 19.2 percent in October, according to the median estimate in a Bloomberg survey. The trade data may be released as early as on Dec. 10.
The yuan’s 20 percent gain since China ended its fixed exchange rate mechanism in July 2005 has squeezed exporters’ profits. Two-thirds of China’s small toy exporters shut down in the first nine months of this year. The economy grew at a 9 percent rate in the third quarter, the slowest pace since 2003.
“We really need the yuan to fall or we can’t go on,” said Li Wencheng, 44, owner of Fulifeng Food Co., which makes candy for Burbank, California-based Walt Disney Co. in the Southern city of Dongguan. “Any exchange rate under 7 per dollar makes it very difficult for us to do business.”
Yuan Stability
The People’s Bank of China kept the yuan little changed against the dollar between July 31 and Nov. 28 as it climbed 21 percent against the euro.
The yuan may weaken to 7 per dollar this year, before strengthening to 6.8 by the end of 2009, Wang Tao, an economist in Beijing for Zurich-based UBS AG, wrote in a Dec. 3 report. She said its performance will depend partly on strength in the dollar. A Bloomberg survey of 27 analysts shows the yuan will likely rise 2.6 percent to 6.7 per dollar by the end of 2009.
Obama, in remarks to the National Council of Textile Organizations published on Oct. 24, called for an end to “manipulation” of the yuan, as the U.S. trade deficit with China ballooned to a record $27.8 billion in September.
Paulson, a Republican, has refrained from naming China as a currency manipulator since he took office in 2006. By contrast, 15 Democrats in the House said in March the U.S. should use its influence with international agencies to persuade China to revalue its currency. Obama is a Democrat.
China’s trade surplus was a record $35.2 billion in October, bringing this year’s total to $216 billion, compared with $262 billion for all of 2007, the customs bureau said Nov. 11. Currency reserves are approaching $2 trillion.
“I expect the yuan to strengthen,” said Rajeev De Mello, head of Asian bonds, who helps invest $586 billion of debt in Singapore at Western Asset Management Co., part of Baltimore- based Legg Mason Inc. “Exporters would like to see a weaker currency, but China is going to rely less on exporting and more on growing domestically.”
Yuan forwards are his biggest holding among Asian currencies.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Judy Chen in Shanghai at xchen45@bloomberg.net.
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