Allianz foresees seven years for Beijing to fully liberate yuan

Beijing will not fully liberalise its currency for at least seven years, though gradual internationalisation of the tender until then should still provide long-term annual currency appreciation versus the US dollar of about 5%, according to Allianz Global Investors.

Helen Lam (pictured), manager of Alliance RCM Renminbi Currency fund, said China would “only do things gradually” and would test market reaction to its moves before taking each next step – but she emphasised Beijing’s long term plan remains to internationalise its currency.

A number of managers alongside AGI have renminbi funds betting on similar appreciation since Beijing unfastened the peg between its currency and the US dollar in 2005. Rivals including ACM Bernstein, DWS Investment and HSBC have such products.

Since 2005, the yuan appreciated by over 20%. Recent moves from Beijing, such as allowing broader trade settlement in yuan, demonstrated ongoing commitment, Lam said.

She does not expect a smooth path of appreciation, and said both FX appreciation and economic expansion in the world’s second largest economy could be tempered by the eurozone, and global, economic slowdown.

She noted a softening of expectations for appreciation since the onset, in August, of the eurozone’s latest bout of troubles, linked with “massive unwinding” of US dollar/yuan positions.

Since August the CNY, whose rate is effectively set by the People’s Bank of China, has appreciated by about 1% versus the USD. Currencies of South Korea, Indonesia, Malaysia and Singapore have all fallen.

Lam noted Beijing could lessen the impact of external headwinds with a foreign reserve stash, exceeding $3trn and about three times larger than that of the next foreign FX saver, Japan.

Figures from the OECD yesterday also indicated China’s path to economic growth may not be straight, and predicted its real GDP growth will slow from 10.4% in 2010 and 9.3% this year, to 8.5% in 2012, before gathering pace again to register 9.5% in 2013.

But overall the non-OECD countries are forecast to contribute between three and four times the provision from OECD economies to quarterly global GDP growth through to 2013.

Lam said China benefited from having a current account surplus – of 5.2% of GDP in 2010, expected to be 3.1% this year – whereas many developed economy balance sheets including America’s show current account deficits.

“Still, there may be some headwinds for the RMB appreciation trend in the short term given developments in the eurozone and slowdown to the global economy.” She also cautioned any tension between Washington and Beijing could hamper progress.

Lam said Beijing could further internationalise the offshore tender by aiding liquidity by encouraging more trading hubs for it, beyond Hong Kong – “but that will be a long process”.

Her Allianz ACM Renminbi Currency fund puts cash on deposit with 10 to 12 banks, with a maturity target of 45 to 60 days. In a chart from AGI showing the intended distribution of accounts, the largest proportion (65%) are with banks whose parentage is Chinese or Hong Kong, followed by the US (23%) and Singapore (12%).

Lam also runs the Allianz RCM Renminbi Fixed Income fund, which is closed to new investors at about €450m.


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