Yuan Forecast to Be BRIC Laggard as Exports Wane: China Credit

Yuan Forecast to Be BRIC Laggard as Exports Wane
Yuan bank notes are arranged in Washington, D.C., U.S. Photographer: Andrew Harrer/Bloomberg

Strategists predict the yuan will be the worst performer of currencies in the biggest emerging markets over the next four months as sluggish exports curb appreciation, limiting appetite for Dim Sum bonds.

China’s currency will advance 1.6 percent to 6.27 per dollar by the end of March, based on the median of analysts’ estimates compiled by Bloomberg. Brazil’s real is expected to strengthen 5.5 percent, Russia’s ruble 2.5 percent and the Indian rupee 6.7 percent. Yuan-denominated bonds in Hong Kong are headed for a sixth monthly decline as reduced prospects that the currency will gain temper demand for the securities.

The yuan has strengthened 3.5 percent this year, the second-biggest advance among 25 emerging-market currencies tracked by Bloomberg, and the U.S. is pressing for faster gains, saying an undervalued currency gives Chinese exporters an unfair advantage. Overseas sales from the world’s largest exporter climbed 16 percent from a year earlier in October, the smallest gain since 2009 and less than the 29 percent jump in imports.

“China’s quite dependent on exports from the perspective of employment and achieving social stability is important for the government,” said Steven Chang, the Hong Kong-based head of foreign-exchange trading in Asia at State Street Bank & Trust Co. “The U.S. continues to play the game of wanting the yuan to appreciate, but if China comes back with a trade deficit in the next six months, we might actually see some depreciation.”

China’s trade surplus was $17 billion last month, compared with $27.2 billion reported for October 2010. Premier Wen Jiabao told U.S. President Barack Obama on Nov. 19 that a more flexible exchange rate may mean declines as well as gains after the U.S. leader said a week earlier that “enough’s enough” regarding China’s yuan policy.

Dim Sum Drop

The yuan has weakened 0.2 percent in November to 6.3693 per dollar, the biggest decline since August 2010, according to data compiled by Bloomberg. The Deutsche Bank Offshore Renminbi Bond Index also declined 0.2 percent, after losing 3.45 percent in the period from June to October.

The retreat in Dim Sum bonds is not the only sign that investor demand for China’s currency is flagging. Financial institutions’ yuan positions stemming from foreign-exchange transactions with the central bank fell 24.9 billion yuan ($3.9 billion) in October. When the People’s Bank of China buys dollars the positions increase, as they have in all but two months since 2000, and when it sells U.S. currency they fall.

Social Stability

Premier Wen said last month the government will continue efforts to foster social stability, which is being tested as factory owners contend with weakening exports and workers’ demands for higher wages. Geoffrey Crothall, a spokesman for the Hong Kong-based China Labor Bulletin, said a surge in labor strikes in November is probably the biggest since a wave of stoppages at suppliers to Japanese automakers last year.

The State Council, China’s chief decision-making body, said on Nov. 25 that it will ban trading of securities and futures on unauthorized exchanges as some of this activity has led to price manipulation and fund embezzlement by exchange managers. Such problems may cause regional financial risks and endanger social stability, the council said.

Last week, the People’s Bank of China lowered the amount some rural cooperative banks are required to keep in reserve to help free up funds for factory owners. In the city of Wenzhou in Zhejiang province in eastern China, more than 90 businessmen have fled and two have committed suicide since April after a credit squeeze left them unable to pay debts and vulnerable to informal lenders charging punitive interest rates, according to a local business group.

Earnings, GDP

Industrial companies’ net income rose 12.5 percent in October from a year earlier, less than 50 percent of the 27 percent pace from January to September, China’s statistics bureau reported this week. Exports to the European Union increased 7.5 percent that month, less than half the growth rate for overall shipments, and sales to Italy slumped 18 percent as a regional debt crisis prompted spending cuts.

Citigroup Inc., UBS AG and Morgan Stanley cut their 2012 economic growth forecasts for China this week, citing a worsening global economy and weakness in the domestic housing market. UBS lowered its projection to 8 percent from 8.3 percent, while Citigroup and Morgan Stanley cut their estimates to 8.4 percent from 8.7 percent. China’s gross domestic product increased 9.1 percent from a year earlier in the third quarter, the smallest gain in two years.

Europe Recession Risk

“China’s export markets are mainly Europe and the U.S. and now we’re seeing there may be a chance of a recession in the euro zone,” said Stella Lee, the Hong Kong-based president of Success Futures & Foreign Exchange Ltd. “It’s definitely not the time for the yuan to appreciate in the next two quarters, given this global backdrop.”

Lee forecasts the currency will trade between 6.36 and 6.39 per dollar in the first half of 2012.

Yields on China’s offshore yuan-denominated debt rose this month, closing the gap with onshore notes. The rate on the government’s 10-year Dim Sum bonds climbed nine basis points, or 0.09 percentage point, to 2.67 percent, according to data compiled by Bloomberg. The rate on similar-maturity onshore notes fell 13 basis points to 3.63 percent, Chinabond data show.

The cost of insuring China’s sovereign bonds against default climbed this month as the economic outlook worsened. Five-year credit-default swaps climbed 22 basis points to 152 basis points, according to data provider CMA, which is owned by CME Group Inc. compiles prices quoted by dealers in the privately negotiated market.

U.S. Politics

China’s exchange rate is a simple issue that has become complicated because of the U.S. political cycle, Commerce Minister Chen Deming said at a conference in Beijing on Nov. 28. Obama plans to seek a second term in a presidential election scheduled for November 2012.

Twelve-month non-deliverable forwards on the yuan declined 0.4 percent this month to 6.3670 per dollar in Hong Kong, a 0.3 percent discount to the currency’s onshore rate, according to data compiled by Bloomberg. The central bank’s reference rate, around which the yuan can fluctuate a maximum 0.5 percent, was set 0.2 percent higher at 6.3482 today. The daily fixings have been stronger than the spot rate for most of the past two months.

Standard Chartered Plc cut its yuan forecast for the end of next year to 6.12 per dollar, from 6.06 this month, and said it expected the Chinese currency to advance 0.6 percent in each of the first two quarters of next year, less than a previous prediction for 1 percent gains.

“The spot rates are consistently trading weaker than the fixings and there’s been a deteriorating balance of payments,” said Robert Minikin, a senior currency strategist at Standard Chartered in Hong Kong. “China’s first quarters are categorized by net flat trade positions and even deficits, so there’ll be a less natural tendency for yuan appreciation.”

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