Fed’s QE2 to Spark China Yuan Advance, OppenheimerFunds Says

The U.S. Federal Reserve may be more effective than Congress in persuading China to let its currency strengthen versus the dollar, according to OppenheimerFunds Inc.

The Fed will buy an additional $600 billion of Treasuries to boost growth in the world’s largest economy, policy makers said yesterday. The U.S. House of Representatives passed a measure on Sept. 29 that would let American companies seek duties on imports from China to compensate for the effect of a weak yuan, a move that the Asian nation said will do nothing to cut the U.S. trade deficit.

“The quantitative easing that the U.S. is doing is putting far more pressure on China to adjust their currency than the loud-mouthed Congress are,” Art Steinmetz, who helps oversee $52 billion as the chief investment officer at OppenheimerFunds, said in an interview in New York. “Clearly, the negative effects of linking the two currencies are going to start to outweigh the positives from the Chinese standpoint.”

The dollar fell to a nine-month low versus the euro after the Fed said it will pump more money into the economy by boosting asset purchases to spur inflation and employment, debasing the world’s reserve currency. China has limited the yuan’s advance to about 2 percent since relaxing a two-year dollar peg in June, fueling criticism that Beijing keeps its currency artificially weak to gain export advantage.

‘Boat Anchor’

With the Fed easing monetary policy, China may find difficulty in raising interest rates to tame inflation without attracting foreign capital and adding pressure for the yuan to appreciate. Consumer prices in China jumped 3.6 percent in the 12 months through September, the biggest annual increase since October 2008.

“The dollar is the boat anchor and it’s pulling this rubber raft below the surface of water,” said Steinmetz, referring to the U.S. currency’s impact on the yuan. “That rope is getting ever more stretched. At some point, it’s going to get cut or it’s going to get snapped.”

It’s “in China’s interests” to keep the yuan appreciating, he said.

Steinmetz manages Oppenheimer’s $13.9 billion International Bond Fund, which has returned 12.6 percent this year, beating 81 percent of competitors, according to data compiled by Bloomberg.

Twelve-month non-deliverable forwards for the yuan climbed 1.2 percent in the past month to 6.43 per dollar, reflecting bets the currency will strengthen 3.9 percent from 6.6761 yesterday, according to data compiled by Bloomberg.

The yuan may rise at least 5 percent in a year as authorities widen currency swings to dampen speculation, Sara Zervos, who oversees the Oppenheimer Emerging Markets Debt Funds, said in the interview.

“They are trying to say it’s not a one-way bet,” said Zervos. The appreciation will “gradually occur,” she said.

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