The yuan's appreciation has largely failed to meet expectations since a swathe of Dim Sum bond funds launched about one year ago, partly with the aim of benefiting from an expected growth in China's currency.
The yuan’s appreciation has largely failed to meet expectations since a swathe of Dim Sum bond funds launched about one year ago, partly with the aim of benefiting from an expected growth in China’s currency.
But Helen Lam (pictured), senior portfolio manager RMB and fixed income strategies at Allianz Global Investors, says investing in China’s offshore bonds and currency markets “was not a one-way bet, and expectations of RMB appreciation have come down compared to a year ago.
Speaking at AGI’s recent press conference in Berlin she said: “Everyone was rushing to the RMB offshore markets because they were expecting a very strong currency appreciation.”
The RMB has enjoyed annualized appreciation of 4% to 5% since it has moved to a trading band in 2005.
As crowds rushed in, yields on Chinese offshore bonds have fallen substantially with off-shore China government bond trading lower than on-shore China government bond yield by close to 3% at one point, and Lam said the market has become “very expensive”.
She said Beijing is keen to prevent the yuan becoming a “speculative currency” and is dampening expectations of further appreciation.
Lam, who runs AGI’s RMB Currency fund and RMB Fixed Income fund, said she expected returns to the fixed income fund to be roughly equally shared between FX appreciation and bond yield.
She expects about 3% volatility from the FX market over the coming year.
“It seems unlikely that China, in a political transitional year, will allow the currency to depreciate and there will be a lot of political pressure from the West.”
Major uncertainty about the Western economies, the RMB’s internationalization, and China shifting to a domestically-led economy, feed into Lam’s prognosis of 2% to 3% appreciation this year.
She said, however, the yuan is undervalued when one looks at the economic fundamentals of China versus the rest of the world. She said Beijing expected export growth to slow from 14% last year, and its current account surplus had fallen from 7.5% in 2007 to 2.5% by the end of 2011 – but China still exhibited stronger macro fundamentals than most Western economies.
“Given all this we do not think RMB appreciation has stopped, but we have altered a different phase of the appreciation cycle. The pace is likely to be slower and possibly with more volatility than China wants.” She said slowing export growth would affect FX appreciation as China shifts to a more domestically driven economy.