Bearish View on China Yuan Is ‘Overdone,’ Brown Brothers Says

By Patricia Lui

Jan. 14 (Bloomberg) -- The market is too bearish on the Chinese yuan because imports will fall faster than exports this year as the economy slows, leaving the trade account in surplus, according to Brown Brothers Harriman & Co. in New York.

China stalled the pace of yuan appreciation against the dollar in mid-2008, sparking speculation that the authorities would weaken the currency to aid exporters hurt by slumping external demand. So-called “hot money” inflows from investors betting on appreciation in the currency, helped drive a 21 percent gain in the yuan since a link to the dollar ended in 2005.

The December trade surplus rose to $38.98 billion, higher than economists expected, and compared with $40.09 billion in November, a government report showed yesterday. Foreign-currency holdings climbed about $40 billion in the fourth quarter to $1.95 trillion, the People’s Bank of China said on its Web site yesterday, less than a $97 billion gain in the prior three months.

“The yuan bearishness was overdone,” Win Thin, a New York- based senior foreign-exchange strategist at Brown Brothers, wrote in a report yesterday. “The pace of reserve accumulation fell off sharply in the fourth quarter but with the trade surplus rising, it appears that the drop is due to easing inflows of hot money.”

The yuan traded at 6.8354 a dollar as of 1:20 p.m. in Shanghai, from 6.8341 yesterday, according to the China Foreign Exchange Trade System. The currency has declined 0.18 percent so far this month after rising 0.17 percent in December.

Forward Bets

Forward contracts show traders have pared expectations since December on how far the currency will weaken in 12 months, Win said.

The implied rate on one-year non-deliverable forwards was 7.0092 to the dollar, according to Bloomberg data, suggesting a decline of 2.5 percent over the next 12 months. The market in December was betting for depreciation of as much as 7.5 percent to 7.3900.

Forwards are agreements in which assets are bought and sold at current prices for settlement at a later specified time and date. Non-deliverable forwards are settled in dollars rather than the underlying asset.

To contact the reporter on this story: Patricia Lui in Singapore at plui4@bloomberg.net