Analysis: Bullish yuan herd leaves China fundamentals in the dust

Sun May 12, 2013 5:10pm EDT
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By Gabriel Wildau

SHANGHAI (Reuters) - Investors convinced China's currency is once again a one-way bet upward should think again: signs of slowing economic growth could cut short the yuan's rally.

Investors and companies have been pouring funds into China in recent months, helping send the yuan to a series of record highs.

But with evidence of a slowdown mounting, investors thinking of joining the rush into yuan would do well to remember 2011 and 2012, when fears of a Chinese hard landing sent the yuan, or renminbi, tumbling.

"Does this herald a return to the old status quo of one-way FX appreciation? Our medium-term answer is 'no,'" Paul Mackel, head of Asian FX research for HSBC in Hong Kong, wrote in an April 14 note to clients. The latest inflows, he wrote, were driven by financial inflows, including speculators betting the yuan will rise. "These expectations could reverse in the future should the domestic and external environments change."

A Reuters analysis of official data indicates that $181 billion in so-called "hot money" portfolio investment flows entered China in the first three months of 2013.

And that estimate may understate the true figure, since it doesn't include those inflows that many economists suspect have been disguised as trade payments.

The inflows have helped push the yuan up 1.1 percent since April. Though hardly dramatic by the standards of freely floating currencies, most analysts began the year forecasting gains of only 1 to 2 percent in 2013.

China's foreign exchange regulator responded earlier this week with new rules aimed at plugging holes in China's capital controls that punters have exploited to bet on appreciation.   Continued...

One Chinese yuan coins are seen in this photo illustration taken in Shanghai April 7, 2013. REUTERS/Carlos Barria