Elmat, BTW, it is not too late for you to stop our bet :0)
http://online.wsj.com/article_print/0,,SB110624642592231552,00.html
Investors Betting On Revalued Yuan Appear to Retreat
Pressure on Beijing Eases
As Market Signals Cooling
Of 'Hot Money' Inflows
By ANDREW BROWNE
Staff Reporter of THE WALL STREET JOURNAL
January 21, 2005
HONG KONG – After feverish expectations that China would let its currency appreciate, a few market signals suggest that some speculators no longer see a revaluation of the yuan, at least for now.
A widely used proxy for assets denominated in Chinese yuan, Hong Kong stocks are down almost 5% so far this year, after rising 13% in 2004, as measured by the benchmark Hang Seng Index. The premium quoted for the yuan on a lightly traded forward market has declined 25% since the start of the year, a sign that traders are more confident the currency, also known as the renminbi, will stay put. And the Shanghai property market, another magnet for speculative cash, appears to be coming off the boil.
Investors are becoming more skeptical that the yuan is likely to come unshackled anytime soon, said Cheah Cheng Hye, managing director of Value Partners, which operates a $550 million fund investing mainly in China-related stocks. "The story is looking very shaky," he said.
Economists at HSBC, Hong Kong's biggest lender, don't see an appreciation in the yuan this year. "I don't think there's any question that the appetite for positioning for renminbi appreciation has diminished," said Richard Yetsenga, Asia currency strategist with HSBC.
The U.S. and other industrialized nations have been pressing Beijing to relax its tight grip on the yuan, which they say is undervalued and gives Chinese exporters an unfair advantage that has translated into a $140 billion trade surplus with the U.S. China's government, however, remains adamant it won't revalue under pressure. Chinese leaders have said they are committed to a floating-currency regime but have given no timetable. The yuan is pegged at around 8.3 to the dollar.
In the later months of 2004, the international pressure on Beijing over China's exchange rate attracted a flood of speculative cash looking for a way to profit from any shift. China's foreign-exchange reserves ballooned by more than $200 billion last year to $609.9 billion, and Dong Tao, chief Asia economist for Credit Suisse Group's Credit Suisse First Boston, reckons some $95 billion came in as "hot money," or speculative investments.
The falloff in Hong Kong stock prices this year suggests some investors betting on the yuan story may have pulled back. So does a creeping rise in the rates at which banks lend funds to other banks in Hong Kong, which were driven close to zero in November last year by the influx of funds. The benchmark one-month interest rate is now at 0.6% after dropping as low as 0.08%.
Because tracking hot money is an inexact business at best, it is difficult to pin down the full extent to which investors are shifting their yuan positions, and why. Investors may park cash in a market's stocks, property or currency for any number of reasons.
Some traders may simply be adjusting their time frame. In fact, many economists still believe the yuan will appreciate sometime this year. J.P. Morgan Chase & Co. expects China to widen the band in which the currency is allowed to trade and shift from the dollar to a basket of currencies as its benchmark, leading to a 7% strengthening in the yuan's value against the U.S. dollar this year. Goldman Sachs Group Inc. forecasts a rise this year of 5%.
Mr. Tao of CSFB said the reason hot money has fled is much more likely to be rising U.S. interest rates than any other factor. "This has little to do with the renminbi and more to do with the dollar," he said. Mr. Tao said some hedge funds that borrowed heavily in attractive U.S. dollars, then invested in Hong Kong stocks -- along with other assets such as oil and commodities -- are now exposed as higher interest rates push up the cost of their loans and may be unwinding a portion of their trades.
Hong Kong interest rates are now substantially below U.S. rates, which adds to the cost of the bet for speculators sitting on Hong Kong dollars.
There are also other reasons some sellers might be unloading Hong Kong stocks. Fund managers say the market no longer looks cheap. Hong Kong's economy bounced back last year after a protracted slump: Almost six years of deflation came to an end, and property prices staged a recovery after a 60% fall from their heights in 1997. But much of the good news is already reflected in stock prices.
However, fading prospects for a quick yuan revaluation, along with an increase in China's interest rates late last year, seem to be cooling the Shanghai housing market, where prices have soared in part on the belief a rising yuan and growing demand for high-end real estate offered investors a double payoff. Property transactions dropped off significantly in late 2004.
The market indications come as pressure on China to revalue its currency is easing. The U.S. presidential election passed without a major focus on trade imbalances with China. Worries that the U.S. wouldn't be able to attract enough capital to feed its current-account deficit were assuaged somewhat with figures that showed foreigners were big buyers of U.S. securities in November (see related article on page C1). And in China, policy makers appear to have engineered a soft landing for the overheating economy without needing to resort to a currency revaluation.
Write to Andrew Browne at andrew.browne@wsj.com1
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