Friday, February 26, 2010

Profit From the Devaluation of the Yuan: China Conducts Yuan Appreciation Stress Tests

Newspaper 21st Century Business Herald, based in Guangzhou City reported today that China is carrying out stress tests on labor-intensive industries to assess the effects a stronger yuan.

This marks a rare discussion in the Chinese media about the real possibility of recovery of the Yuan, amid growing speculation that Beijing may be about to allow the return of currency appreciation. According to initial results of the tests, which focused on exporters of textiles, shoes and toys, each percentage point of appreciation of Yuan would take one point from their profit margin. That would be a serious blow to profitability, since often the net profit margin of exporters is only 3% to 5%, the newspaper said.

The Yuan’s value has been kept at about 6.83 per dollar since July 2008, following a 21 percent advance over three years, as policy makers intervened to help exporters weather a global recession.

Investors interested in currency ETFs can check our Live tracking site. CYB and CNY and two ETFs that track Chinese currency. Since January 2009 they have returned less than 2%, reflecting the pegging of the rate.

Yuan forwards strengthened the most in two weeks after a local newspaper reported that the government is assessing the likely impact of currency gains, fueling speculation appreciation will be allowed to resume.

Yuan's utures contracts indicate that yuan will rise 2.5% from the current spot rate. However, Yuan forwards underestimate the pace of gains in China’s currency, which may strengthen as much as 7% in 18 months, according to Wells Fargo & Co.

Nick Bennenbroek, head of currency strategy at Wells Fargo in New York, said that the central bank may allow the yuan to resume appreciation around the middle of the year and will then seek an annual 6 to 8% advance against the dollar.

Reported by Agencia Estado (in Portuguese).

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