Chinese Yuan: Fresh All Time Highs in 2013

currency
harper1
Head of Fixed Income & Currency
06/04/2013

In the first four months of 2013, the Chinese yuan has appreciated by 1.05% against the U.S. dollar, continuing its march through all time highs.1 For the remainder of the year, we see several positive catalysts for why the yuan could keep moving higher:      • In a recent speech, Chinese Premier Li Keqiang focused on the need for reform in the government; we      believe that part of this agenda could be the continued promotion of Chinese yuan holdings in Asia and a      timetable for increased currency liberalization.      • In 2012, the Chinese government widened the daily trading band to 1.00%. In 2013, we believe that      regulators will widen the band to 2.00%, potentially causing a new round of investor interest.      • While some investors have been disappointed with recent economic data, many economists are still      projecting close to 8% annualized economic expansion for China in 2013. In a speech published on a Chinese government website2, Premier Li laid out a frank yet encouraging discussion about how China’s government needs to reform in order to promote growth. While no specific policies were mentioned, the theme of getting the government out of the way and allowing private industries to lead China’s growth was at the center of his argument. As a result, many economists view this rhetoric as a clear positive for China’s economic future. As we mentioned in a previous blog, China’s transition from an export-driven, manufacturing-based economy to a domestic, service-driven economy is a priority for the new administration. Also central to this plan is the wider trading and use of China’s currency, the yuan. In the coming months, we expect Chinese policy makers to expand the daily trading band to at least 2.00%. Currently, the yuan is only permitted to trade within a 1.00% band. We believe this move is consistent with a future plan to liberalize the yuan, ultimately leading to full convertibility against other major currencies. Recently, a variety of sources including Bloomberg quoted3 a five-year path to yuan convertibility. While several intermediate steps need to occur before this can become a reality (such as allowing market forces to dictate longer-term interest rates), we believe the Chinese yuan will continue its moderate pace of appreciation while these plans are devised. Should the government provide more formal guidance about reform measures and a plan for currency liberalization, we believe these policies could serve as a catalyst for increased trade and investment on the mainland. Increased trade activity, higher equity prices and a better understanding of the glide path of China’s economic policies could ultimately provide a fresh catalyst for investment in the Chinese yuan.     1Source: Bloomberg, as of April 30, 2013. 2Source: http://paper.people.com.cn/rmrb/html/2013-05/15/nw.D110000renmrb_20130515_1-02.htm 3Source: http://www.bloomberg.com/news/2013-05-06/china-names-yuan-convertibility-plan-among-goals-for-this-year.html

Important Risks Related to this Article

There are risks involved with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments focused in China are increasing the impact of events and developments associated with the region, which can adversely affect performance. Investments in emerging or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations.
About the Contributor
harper1
Head of Fixed Income & Currency
Rick Harper serves as the Head of Fixed Income and Currency for WisdomTree Asset Management, where he oversees the firm’s suite of fixed income and currency exchange-traded funds.  Rick has over 22 years investment experience in strategy and portfolio management positions at prominent investment firms. Prior to joining WisdomTree in 2007, Rick held senior level strategist roles with RBC Dain Rauscher, Bank One Capital Markets, ETF Advisors, and Nuveen Investments. At ETF Advisors, he was the portfolio manager and developer of some of the first fixed income exchange-traded funds. His research has been featured in leading periodicals including the Journal of Portfolio Management and the Journal of Indexes. He graduated from Emory University and earned his MBA at Indiana University.