Top Yuan Forecasters See Dip as Dim Sum Bonds Fall: China Credit

Top Yuan Forecasters See Dip as Dim Sum Bonds Fall
One hundred-yuan Chinese banknotes pass through a currency counting machine in an arranged photograph at Hang Seng Bank Ltd. headquarters in Hong Kong, China. Photographer: Jerome Favre/Bloomberg

The most-accurate forecasters for the yuan predict the currency will retreat from a 19-year high this quarter as China prevents gains that may hurt exports.

The yuan will slip 0.2 percent to 6.3 per dollar in the three months through December, according to Credit Agricole CIB and BNP Paribas SA, which had the best estimates for the last six quarters as measured by Bloomberg Rankings. Declines may curb demand for Dim Sum bonds after the average yield on the notes climbed in each of the last eight weeks, the longest run of increases in Deutsche Bank AG data going back to January 2011.

Standard Chartered Plc rates the debt “underweight” because of the “lack of an appreciation story,” it said in a research note yesterday. Pacific Investment Management Co., manager of the world’s biggest bond fund, sees limited scope for yuan gains as growth slows in the world’s second-largest economy. Data next week will show gross domestic product rose 7.4 percent in the third quarter, the least since March 2009, according to the median estimate in a Bloomberg survey.

“China seems to be targeting a stable-to-weaker real exchange rate in order to support its exporters,” Dariusz Kowalczyk, a senior strategist at Credit Agricole in Hong Kong, said in an Oct. 4 interview. “We believe that the appreciation versus the dollar seen since late July has been partly caused by the desire to placate U.S. pressure.”

Analysts were ranked according to the accuracy of their estimates in each of six quarters beginning with the three months through June 2011. To test long-term accuracy, Bloomberg added one annual forecast made on Sept. 30, 2011 for Sept. 30 this year. Credit Agricole was first, BNP Paribas second and Westpac Banking Corp. third in making predictions for the yuan.

Near Limit

China’s currency rose 1.1 percent in the last three months and reached 6.2812 per dollar yesterday, the strongest level since 1993. That level was 0.98 percent stronger than the central bank’s reference rate, near to the maximum 1 percent divergence that is permitted. The daily fixing was weakened 0.03 percent yesterday and a further 0.02 percent today. The currency was little changed today at 6.2881 as of 12:30 p.m. in Shanghai.

The average yield on Dim Sum bonds, yuan-denominated notes sold outside of China, fell five basis points, or 0.05 percentage point, to 4.07 percent yesterday, according to a Deutsche Bank index. It jumped 36 basis points in the last eight weeks.

Investors ‘Wary’

Support for Dim Sum bonds “comes from investors hoping to gain from currency appreciation rather than credit carry,” Stephen Green, head of Greater China research at Standard Chartered, wrote in the research note. “The lack of a positive turn in China’s macro data has made investors wary of holding Chinese risk.”

The International Monetary Fund lowered its estimate for China’s growth this year to 7.8 percent from a July projection of 8 percent, it said today. The Asian Development Bank and the World Bank also cut their 2012 economic growth forecasts for China to 7.7 percent from 8.2 percent in the past week. Outgoing Premier Wen Jiabao aims to stop growth slipping below his 7.5 percent target for this year, an annual pace that would be the weakest since 1990.

“Short-term worry over the economy is larger than the long-term appreciation hope,” Chen Xingdong, a Beijing-based analyst at BNP Paribas, said in a phone interview on Oct. 4. “So, we are not seeing a too strong appreciation now.”

Bond Risk

Even so, the cost of insuring China’s bonds has declined on bets the economy will avoid a sharp slowdown. Five-year credit-default swaps protecting the nation’s sovereign notes dropped six basis points last week to 83 in New York, and were little changed yesterday, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

The State Council announced measures last month to alleviate pressure on exporters such as speeding up tax rebates and expanding financing channels. While the government said it’s sticking to its target of 10 percent growth in overall trade this year, overseas sales increased only 2.7 percent in August, following a 1 percent expansion in July, with inbound shipments falling 2.6 percent.

‘Limited’ Potential

Pacific Investment Management said although “the near term potential for China is more limited,” the yuan is a good investment that will likely appreciate in coming years. While China gets used to a “new normal” growth rate of 7 percent, the economy isn’t facing a hard landing, it also said.

“Chinese productivity growth continues to be higher than its Western trading partners and China continues to run a trade surplus at a time when the global economy is still in the process of rebalancing,” Ramin Toloui, Pimco’s global co-head of emerging markets portfolio management, said in an Oct. 3 interview in Singapore. “Those suggest to us that the yuan is likely to appreciate in the coming years.”

China recorded a trade surplus of $122 billion for the first eight months of this year, following an excess of $158 billion in 2011. The U.S. had a deficit of $330 billion this year through July and Japan had a shortfall of 3.44 trillion yen ($44 billion) through August, official data show.

President Barack Obama’s administration said China keeps the yuan undervalued, giving its exporters an unfair advantage in global trade. Calls for appreciation are heating up before a U.S. presidential election in November.

U.S. Election

Obama touted a trade complaint against China last month over illegally subsidizing exports of automobiles and auto parts. Republican candidate Mitt Romney said he would on his first day in the White House tell the Treasury Department to list China as a currency manipulator, paving the way for more duties on Chinese imports.

Obama led Romney in a Gallup poll of registered voters surveyed between Sept. 28 and Oct. 4 at 50 percent versus Romney’s 45 percent. The margin of error is two percentage points.

“We expect a continuation of the current U.S. policy towards the Chinese yuan,” Huw McKay, senior international economist in Sydney at Westpac, said in an Oct. 3 interview. “There are very different views out there and I don’t think there’s a real consensus on China. We expect domestic demand will bottom very soon.”

Westpac, the third most-accurate forecaster, predicts the yuan will weaken 0.6 percent to 6.32 per dollar this quarter.

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