China's Currency Not Dying, Deutsche Bank Says

May 17 2014, 12:34pm CDT | by

The Chinese yuan is second only to the Russian ruble as the worst performing BRIC currency compared to the dollar.  It’s down nearly 3% to the greenback this  year, while the Brazilian real is up 6.3% and the Indian rupee is up 5.4%.  Even the Mexican peso is doing better, up 1.12% against the dollar.  Yet, some pundits will have investors believing that the weaker yuan signals the ongoing decline of the Chinese economy.  For them, the yuan’s days of strengthening are over as Beijing opts for a weaker currency to keep cheap exports flowing Westward.

Not so fast, says Deutsche Bank in China.  This currency is not dead yet. In fact, its just beginning to flex its muscles.

Deutsche Bank recently opened its seventh location in China, this one in the new Shanghai Free Trade Zone. Their executives say that demand for the Chinese currency, the yuan, among their corporate clients is growing. In Shanghai, the bank focuses on yuan-denominated cross-border transactions and services ranging from yuan cash pooling and trade financing to cross-border lending and interest rate hedging.

“Surely but slowly global use of the yuan will rise as China gradually makes the currency fully convertible in both trade and investment,” Lee Beng-Hong, head of markets at Deutsche Bank China, told China Daily in an interview published Saturday. “That spells huge opportunities for global banks like us.”

Lee said the yuan’s recent weakening against the dollar hasn’t changed investor sentiment for the longer term trend in the Chinese currency. “Corporations have real demands to use the yuan as one of their payment currencies,” Lee told the Daily. “The demand, supported by China’s steady economic growth, far outweighs the exit of some speculators.”

The yuan is up around 20% against the dollar since 2005. It weakened significantly in 2008 during the financial crisis and again this year amid a slowdown in the Chinese economy. The yuan is not a free-floating currency, but many fixed income fund managers believe the trend is for the yuan to strengthen as the Chinese economy grows.

Edmumd Harriss, a fund manager at the Guinness Atkinson Renmimbi Yuan & Bond Fund, has told FORBES in previous interviews that the yuan is a relatively stable way for investors to diversify away from the dollar.

“You can invest in bank CDs, and corporate bonds. The market is still a bit thin, but we expect that to change over time,” he said. “The long term trend is for the yuan to get stronger, not weaker, as more companies throughout Asia use it in financial transactions. We are seeing that now. It’s no longer a matter of if anymore. The yuan is being used as a trade currency now, slowly but surely,” he said.

Much of the yuan is dependent on China growth. And China is not growing as much as it used to.

The deceleration of China’s economy may even continue during the current quarter, Barclays Capital economist Jian Chang said last week in a note to clients, but an uptick in some leading indicators point to improvement in the months ahead.

Over the last three months, China has been massively lagging the MSCI Emerging Markets Index. The iShares FTSE China (FXI) exchange traded fund is up only 0.5% while the MSCI EM is up 8.26% in the last three months. Year to date, FXI is down more than 6% while the benchmark MSCI EM is up 2.7%.

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