speculators bet us$20b on yuan rise

  1. 6,931 Posts.
    It will be interesting to see who wins in this tug-o-war.

    Saturday, August 9, 2003

    Speculators bet US$20b on yuan rise: report
    They predict the mainland will buckle under pressure to revalue its currency

    ALLEN T. CHENG in Beijing

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    International pressure on China to revalue the yuan increased yesterday after reports that hedge funds and currency speculators have built a US$20 billion position in the trading of non-deliverable forwards, expecting that the Chinese currency will rise in coming months.
    Xinhua cited a report from Beijing-based International Finance News that punters in New York were betting that mainland officials would buckle under international pressure.

    Two weeks ago, US Treasury Secretary John Snow announced that his country would seek bilateral talks with central government officials to revalue the yuan. This week, members of the US Congress asked the General Accounting Office to investigate China, Japan, Taiwan and South Korea for currency "manipulation".

    US officials cite a US$100 billion trade deficit with the mainland as the main driver for their push to revalue the yuan. In recent weeks, trade officials from the European Union and Japan also have joined the chorus for a revaluation.

    Chinese officials have stated emphatically that they will not revalue, and economists doubt that the punters would be able to gatecrash the mainland currency markets the way they did with Southeast Asian nations during the Asian economic crisis.

    Tang Xu, head of the graduate research department of the People's Bank of China, was yesterday quoted by Xinhua as saying the central government's policy regarding the yuan had served the nation well in maintaining a "smooth operation" of the financial system and the policy "ought not be changed easily".

    "China has capital controls and all they can do is place bets on non-deliverable forwards," said Huang Yiping, China economist with Citigroup in Hong Kong yesterday.

    "It will just raise the risk premium in the markets but will not impact China's domestic markets. In the international markets there will be some impact. Clearly, there will be a buildup of expectations that the renminbi will revalue."

    Mr Huang said domestic Chinese enterprises were expecting the yuan to revalue despite the fact that senior government officials, including Premier Wen Jiabao, had stated that they will not change the currency regime.

    In the past six months, the mainland's foreign exchange reserves have shot up by US$60 billion, far in excess of the US$30 billion rise in foreign direct investments and US$4 billion in trade surplus.

    "Where did the extra $26 billion come from?" Mr Huang asked. "A substantial portion may have been money that Chinese enterprises and investors have repatriated from abroad."

    "If the foreign exchange reserves continue to rise rapidly, this may put even more pressure on the government," Mr Huang said. "This adds pressure on the government to take on more foreign currency risks."

    There is one upside: even more foreign investors may invest in the mainland as expectations mount on a yuan revaluation. The downside, however, is that many of the investors may be those who invest "hot money", or short-term speculators.

    Although the mainland has rigid capital controls, punters still can use accounts in Hong Kong and other tax havens to move money in and out through both legitimate as well as underground banking channels.

    Shell companies and trading houses have traditionally allowed companies in Hong Kong and elsewhere to move large amounts of mainland profits illegally abroad. These shell companies and accounts also can help speculators to repatriate profits.

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