China to Limit Yuan in Poll Signaling No. 1 Economy

Most global investors expect China to become the world’s biggest economy over the next two decades, and they are divided over whether that will help or hurt the economies of other industrialized countries.

There’s also a strong consensus that China won’t move very aggressively to increase the value of its currency by the end of next year, according to a global quarterly poll of 1,408 investors, analysts and traders who are Bloomberg subscribers. Almost seven in 10 expect China to revalue the yuan by a few percent or less against the dollar, rather than a surge like the yuan’s roughly 20 percent rise between 2005 and 2008.

While the largest percentage of those surveyed say China’s economic growth will provide a bigger market for exports from other nations, some investors worry that China’s ascendance will hurt labor markets in competing nations, and one-quarter of respondents expect a stronger China will push up oil and agriculture prices.

“If China becomes the biggest economy, it will result in higher commodity prices because the country needs more resources for their output, plus the population will have higher earnings,” said Erik Bakker, an asset manager for OHV Asset Management in the Netherlands.

Non-deliverable yuan forwards rose 0.1 percent to 6.5765 per dollar as of 6:06 p.m. in Hong Kong today, reflecting traders’ bets that the currency will gain about 1.9 percent in the next 12 months. Chinese markets are closed for a holiday.

Bullish on China

More than half of respondents in the Bloomberg Global Poll say they are bullish about China’s prospects for long-term investments, in contrast to about a third of investors who take a bearish view. They split more evenly over how China’s ascent will affect other major economies.

European investors were the most optimistic, with 60 percent of respondents from that region saying they were bullish on China as a long-term investment opportunity, compared to 53 percent in the U.S. and 56 percent in Asia. Likewise, just 28 percent of European investors say they are bearish, compared to 36 percent in the U.S. and 34 percent in Asia.

China overtook Japan in the second quarter as the world’s second-largest economy, and it is the second largest U.S. trading partner. Along with Brazil, China led the list of most attractive investment locations in the survey, with 33 percent of investors citing it as the country with the best opportunities over the next year.

‘Excellent Venue’

“The more important aspect of China’s growth, and the reason for my bullishness, is that this provides an excellent venue for direct foreign investment into China by U.S. companies,” said Will Aston-Reese, vice president for money-market sales at Tradition Asiel Securities Inc., in New York. “In essence, we’re exporting investments and, hopefully, importing profits.”

Investors see China’s prospects as better than those of its neighbor, Japan, which 30 percent of respondents cite as the worst place to invest over the next year. At the same time, many expect that Japan’s efforts to weaken its currency won’t bear much fruit.

Four out of 10 investors expect the yen to appreciate against the dollar in the next year, even though Japan intervened last week in the currency markets for the first time since 2004. About a quarter of respondents expect the yen to remain about the same against the dollar, and another 25 percent predict some depreciation.

The quarterly Bloomberg Global Poll is based on interviews Sept. 16-17 with a random sample of 1,408 Bloomberg subscribers. The survey, taken by Des Moines, Iowa-based Selzer & Co., has a margin of error of plus or minus 2.6 percentage points.

Trade Tensions

Tensions over China’s exchange rate and tightly controlled economy raise concerns that the Asian nation may not live up to its promise. Earlier this month, the U.S. filed a pair of trade complaints against China over payment services and steel exports. The Obama administration also is stepping up pressure on Beijing to let the yuan appreciate more than the 1.8 percent it has gained since a June decision to drop the yuan’s peg to the dollar.

“In the short run, I’m incredibly bearish,” said Scott Frew, a general partner at Rockingham Capital Partners in Glastonbury, Connecticut. “China’s property market is a bubble without question, and one that must eventually burst.”

Almost two-thirds of investors say there is a bubble in Chinese property markets, with one in five investors disagreeing.

‘Tons of Bad Loans’

“China’s banks are sitting with tons of bad loans; that will eventually have to be recognized and dealt with,” Frew said. “And lastly, China’s reaction to the slowdown in 2008, vastly increasing fixed investment, was brutally bad policy.”

These concerns don’t appear to dampen China’s prospects for growth. Most respondents expect China will become the world’s largest economy, with 26 percent predicting its ascent in the next 10 years and an additional 38 percent seeing such growth within two decades.

“China could be bigger than the U.S.A. in 20 years,” said Mario Di Marcantonio, a senior global portfolio manager at Eurizon Capital in Milan. “The Chinese economy has driven the big expansion of the cities -- now the rural parts of China need to grow as well.”