Yuan likely to rise 5 pct in 2010: WisdomTree

By Steven C. Johnson

NEW YORK (BestGrowthStock) – China’s yuan will rise 5 percent against the dollar this year while India’s rupee and other emerging market currencies should outperform developed currencies, according to WisdomTree Asset Management.

Bruce Lavine, president of WisdomTree Asset Management, told Reuters in an interview that he expects a 2 percent yuan revaluation in the next two to three months and another gradual 3 percent rise by year-end, leaving the dollar at 6.5 yuan.

China’s central bank has kept the dollar locked at 6.82 yuan since mid-2008 to blunt the impact of a global financial crisis that had threatened to undermine the country’s export-led growth strategy.

In recent months, U.S. lawmakers have turned up the pressure on Beijing, with some demanding a revaluation of anywhere from 25 percent to 40 percent and threatening punitive tariffs on Chinese goods.

The U.S. Treasury cooled things down when it opted to postpone a decision, originally due April 15, on whether or not to declare China a currency manipulator.

And while a revaluation of 25 percent or more is unlikely, a stronger yuan this year is, in currency market terms, the nearest thing to a one-way bet that investors are likely to find, said Lavine, who runs the $711 million WisdomTree Dreyfus Chinese Yuan Fund.

“The U.S. has backed off on calling China a currency manipulator, China has some internal issues that would be well served by a (yuan) rise, so it just seems everything’s lined up and it should happen,” Lavine said.

“It looks like the worst case scenario for the next three to six months is that nothing happens, and if nothing happens, you’ll lose a percent or two because of the expectation that’s been built in,” he added.

“But the upside case is that you make 5 percent or the government surprises and there’s even more to be had. So it seems balanced more toward the upside.”

Lavine said a firmer yuan, higher bank reserve requirements and lending rates, would help China combat inflation but said Beijing would likely delay a move for a few months to avoid the impression that it was bowing to foreign pressure.

The WisdomTree Dreyfus Chinese Yuan Fund Yuan is the biggest of the firm’s eight exchange-traded currency funds.

It uses off-shore non-deliverable forwards to gain exposure to the Chinese currency. These allow investors to speculate using previously agreed exchange rates for a future date while avoiding the spot market, which is tightly controlled.

The one-year yuan NDF was last pricing in a dollar-yuan rate of 6.62, while the six-month NDF had the rate at 6.70.


Lavine is nearly as bullish on other emerging market currencies, which he says are more attractive than the main developed country currencies such as the U.S. dollar, euro, Japanese yen and British pound.

Emerging markets in general benefit from trade surpluses, lower debt-to-GDP ratios, and higher real interest rates, he said, and their currencies are likely to win an increased share of global foreign exchange reserves over the years to come.

Lavine said WisdomTree was particularly bullish on India’s rupee, which did not enjoy as big a run-up in 2009 as other emerging market favorites such as the Brazilian real.

“India hasn’t quite caught on yet, but from a long-term basis, it’s got all the reasons to go higher — it’s a cheap currency based on purchasing power and India has great demographics,” he said.

As for China, the biggest risk would be a sudden economic shock that sparks social unrest and forces authorities to start considering a downward revision of the yuan, Lavine said.

Short-seller James Chanos, head of the New York-based Kynikos Associates, has become a market Cassandra of sorts with regular warnings that China has inflated a housing bubble that will eventually burst.

“If they went through a housing crisis like we did, yes, there would be discussions of a revaluation lower,” Lavine said. But “the unwinding of housing bubbles are hard to time. People were warning of that here for years before it actually unwound.”

(Reporting by Steven C. Johnson; Editing by Kenneth Barry)

Yuan likely to rise 5 pct in 2010: WisdomTree