Bloomberg
Yuan Bets Reined In After ‘Masterful Job’ at G-20: China Credit
November 15, 2010, 1:45 AM EST
By James Regan
Nov. 15 (Bloomberg) -- Investors are paring bets on yuan gains after China deflected U.S. criticism of its currency policy at a Group of 20 summit, saying money-printing by the Federal Reserve may destabilize the global financial system.
One-month non-deliverable forwards at the end of last week indicated depreciation versus the dollar for the first time since Sept. 14, according to data compiled by Bloomberg. The 0.43 percent advance projected by three-month contracts was the least since Sept. 20. The contracts had been pricing in gains of 0.4 percent and 1.1 percent, respectively, a week earlier.
While U.S. President Barack Obama said Nov. 12 that the yuan was “undervalued” and he expects “progress on this issue” after talks with President Hu Jintao, Brazil and Germany criticized this month’s decision by the Fed to pump $600 billion into the financial system. China “doesn’t support” the monetary easing that causes “imported” inflation in developing countries, Commerce Minister Chen Deming told a Nov. 13 forum in Macau.
“The Chinese have done a masterful job of playing the cards on this one,” said New York-based Michael Novogratz, principal and director of Fortress Investment Group LLC, which oversees $44 billion of assets. “They’ve turned a problem of them having a pegged currency into our problem.”
Bank of America Corp., Citigroup Inc. and Societe Generale SA all said they maintained their yuan forecasts for the end of this year and next following the G-20 talks, which took place Nov. 11-12 in Seoul.
‘Behind Closed Doors’
“Beijing never wanted to use the G-20 as a forum for the exchange rate to be decided as it doesn’t want the world to have a one-way bet on the Chinese currency,” said Claudio Piron, head of emerging Asia foreign exchange and fixed-income strategy at Bank of America in Singapore. “China wants to decide the currency rate behind closed doors, something more discreet.”
Piron predicts the yuan will strengthen 0.7 percent to 6.6 per dollar by the end of next month and a further 3.1 percent to 6.4 in 2011. Citigroup forecast an end-2010 exchange rate of about 6.55, and 6.25 a year later.
Cliff Tan, head of emerging-market currency research at Societe Generale in Hong Kong, said the 7 percent annualized rate of appreciation recorded since China ended a two-year peg to the dollar on June 19 is “a pace that both China and the U.S. can live with.”
The yuan has strengthened 2.7 percent to 6.6441 per dollar in Shanghai since the peg was scrapped and non-deliverable forwards show traders expect a 2.8 percent advance to 6.4657 in the coming 12 months. The one-month contract was at 6.6375 at the end of last week and the spot rate at 6.6370.
Brazil’s real rose 2.9 percent since June 19, India’s rupee climbed 1.3 percent and the Russian ruble declined 0.3 percent, according to data compiled by Bloomberg.
Interest Rates
The yuan was one of only two gainers last week among 25 emerging-market currencies tracked by Bloomberg and reached a 17-year high of 6.6173 per dollar on Nov. 11, when government data showed inflation accelerated to a two-year high of 4.4 percent in October. China’s 12-month swap rate reached the highest level since October 2008 as investors stepped up bets the central bank will add to last month’s increase in borrowing costs.
The People’s Bank of China boosted its benchmark one-year lending rate on Oct. 19 by a quarter of a percentage point to 5.56 percent, the first increase since 2007. The median forecast for end-2011 was 6.31 percent, up from 6.06 percent when Bloomberg last conducted a survey on Oct. 21. Societe Generale, France’s second-largest bank, predicts there will be a percentage point of increases, starting next month.
Swaps, Bonds
China’s 12-month interest-rate swap, the fixed cost needed to receive the floating seven-day repurchase rate, rose one basis point, or 0.01 percentage point, today to a two-year high of 2.63 percent. The yield on the 3.29 percent bond due September 2020 was little changed at 3.98 percent, according to China Interbank Bond Market. The rate on similar-maturity U.S. Treasuries climbed three basis points to 2.82 percent.
The yield premium offered by 10-year government debt in China over the U.S. reached 133 basis points on Nov. 11, the most it’s been in Bloomberg data going back to June 2005.
The Shanghai Composite Index of shares on Nov. 12 plunged 5.2 percent, the biggest decline since August 2009, on concern more expensive credit will cool growth in the world’s fastest- growing economy. The gauge advanced 0.1 percent today after HSBC said the plunge offers investors a buying opportunity and predicted gains of as much as 15 percent by June.
Strong Momentum
“The medium-term outlook is good,” said Arjuna Mahendran, the head of investment strategy for Asia in Singapore at HSBC Private Bank, a unit of Europe’s largest lender overseeing $460 billion globally. “The momentum of the economy is strong. The question is whether it’s too strong.”
The central bank will “flexibly use our traditional monetary-policy tools,” People’s Bank of China Deputy Governor Hu Xiaolian said Nov. 11 in Beijing. Policy makers raised banks’ reserve-requirement ratios last week by as much as a percentage point, seeking to restrain credit growth to 7.5 trillion yuan ($1.1 trillion) this year. New lending totaled 6.88 trillion yuan in the 10 months through October.
Economic growth in China has averaged 10 percent in the past five years, compared with rates of 4.2 percent in Brazil, 3.9 percent in Russia and 8.5 percent in India. Gross domestic product increased 9.6 percent from a year earlier in the third quarter, the smallest gain in a year, official figures show.
Credit-Default Swaps
The annual cost of insuring China’s foreign-currency debt for five years rose seven basis points last week to 61, on a par with the U.K., credit-default swaps show. Moody’s Investors Service on Nov. 11 upgraded China’s foreign- and local debt ratings to Aa3, the fourth-highest ranking. The U.K. has a Aaa rating, the highest grade.
Five-year credit-default swap contracts for top-rated yuan- denominated bonds were little changed last week at 92 basis points, according to data compiled by Bloomberg. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
China’s efforts to tackle asset bubbles and avert the spread of bad loans has meant the “likely containment and effective management” of losses from record lending last year to counter the financial crisis, Moody’s said in a statement. That combined with China’s “resilient” economic growth were reasons for the upgrade, the ratings company said.