Yuan Forecasts at Triple Forward Rates Draw Funds: China Credit
Nov. 26 (Bloomberg) -- Pioneer Investment Management Ltd. and Western Asset Management Co. are increasing bets on the yuan appreciating as analysts forecast the currency will gain at triple the rate reflected in prices of forwards contracts.
Twelve-month non-deliverable forwards weakened 0.3 percent to 6.5275 per dollar yesterday in Hong Kong, implying the yuan will strengthen 1.9 percent from the Shanghai spot rate of 6.6508, according to data compiled by Bloomberg. That's the smallest advance indicated since September. The currency will appreciate 6.2 percent to 6.2600 by the end of 2011, according to the median estimate of 17 economists surveyed by Bloomberg.
The central bank will allow a 7 percent annual pace of yuan appreciation through June and raise interest rates four times as it tackles the fastest inflation in two years, Standard Chartered Plc forecast this week. China's central bank has allowed the yuan to climb 2.6 percent since a dollar peg ended in June, raised borrowing costs in October for the first time since 2007 and last week increased banks' reserve-ratio requirements for the fifth time this year.
"China would like to calm upward pressure on inflation, reduce excess liquidity and capital inflows, so we can expect more to come on the reserve-ratio side, on the rate side and on the currency side," said Andreas Koenig, a senior currency fund manager in Dublin at Pioneer, which manages 185 billion euros ($246 billion). "Demand for yuan will remain and probably even intensify."
Hu's Visit
Pioneer and Western Asset, which together oversee $715 billion, say they have added to their holdings of non- deliverable forwards this month. Robert Minikin, a senior foreign-exchange strategist at Standard Chartered in Hong Kong, on Nov. 24 recommended investors buy three-month contracts, noting China may let yuan gains accelerate before President Hu Jintao visits Washington in January.
Hu's visit "will be an important time to look at exactly what the quantum of progress has been" on China's currency reforms, U.S. National Security Adviser Thomas Donilon said Nov. 14. President Barack Obama said the previous day that the yuan was "undervalued," speaking after Group of 20 nations' talks in Seoul.
The yuan has strengthened 25 percent versus the dollar in the past decade, outpacing gains of 13 percent for the Brazilian real and 2.9 percent for India's rupee, according to data compiled by Bloomberg. Russia's ruble weakened 11 percent in that time.
'Undervalued' Forwards
The yuan accounted for 11.6 percent of the currency exposure of Western Asset's $480 million Asian Opportunities Fund at the end of October, according to a statement issued by the firm on Nov. 23. That's up from 7.5 percent on July 31.
"Yuan non-deliverable forwards are currently undervalued," said Rajeev de Mello, head of Asian investment in Singapore at Western Asset Management Co., which oversaw $469 billion at the end of September. "The Chinese currency could appreciate 3.5 to 4 percent at an annualized rate; based on this, the contracts look cheap."
Twelve-month yuan forwards indicated 5.1 percent yuan appreciation on average between April 2006 and December 2007, the last cycle of interest-rate increases in China. The benchmark one-year lending and deposit rates were raised 1.89 percentage points to 7.47 percent and 4.14 percent, respectively, in that time. Last month's quarter of a percentage point increase lifted the rates to 5.56 percent and 2.5 percent.
Lending Curbs
China's 12-month interest-rate swap, the fixed cost needed to receive the floating seven-day repurchase rate, yesterday jumped 20 basis points, or 0.2 percentage point, to a two-year high of 3.21 percent after the People's Bank of China said it will "normalize" monetary conditions.
The yield on the 3.28 percent government bond due in August 2020 slipped one basis point to 3.98 percent, according to the National Interbank Funding Center. It's climbed 28 basis points this month and reached 4 percent in the last two weeks, the highest level for a benchmark 10-year note since September 2008.
The central bank will control the pace of bank lending for the rest of the year as it will be difficult to stay within the government's 7.5 trillion yuan ($1.1 trillion) target for new loans, Deputy Governor Hu Xiaolian said in a Nov. 24 statement. New lending totaled 6.88 trillion yuan in the last 10 months, official figures show.
Consumer prices increased 4.4 percent from a year earlier in October, exceeding the official 3 percent target for 2010. Inflation may reach 5 percent by mid-2011, prompting the central bank to "accelerate monetary tightening," said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong. The rate will average 5.5 percent next year, Standard Chartered forecast this week.
'Bullish' on Yuan
"China's monetary policy has a lot more focus on inflation," said Ryosuke Kawahata, a Tokyo-based fund manager at Mizuho Asset Management Co., which oversees the equivalent of $41 billion. "They have been allowing appreciation at quite a fast pace this year and that hasn't caused much damage to the economy, which is strong and solid enough to withstand the adjustment. We are bullish on China's currency."
Kawahata helps manage Mizuho's Growing Asia Fund, which splits its assets evenly between China, India and Southeast Asia. China's economy grew 9.6 percent in the third quarter from a year earlier, following a 10.3 percent expansion in the previous three months.
The annual cost of insuring China's foreign-currency debt for five years using credit-default swaps rose four basis points to 64 in the three days ended Nov. 24, according to CMA prices. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should the government fail to adhere to its debt agreements.
To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net Yumi Teso in Bangkok at yteso1@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net .
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