By Kim Kyoungwha and Judy Chen
May 27 (Bloomberg) -- Investors from London to California are increasing bets that China will let its currency appreciate at a faster pace even as makers of toys, textiles and sporting goods say a stronger yuan has made their exports uncompetitive.
Aberdeen Asset Management Plc doubled its stake in the yuan forwards market after contracts giving the right to buy the yuan in 12 months slumped as much as 5 percent this quarter. Pacific Investment Management Co., manager of the world's biggest bond fund, and Pictet Asset Management also said they placed wagers on the currency to gain.
While Deutsche Bank AG and Citigroup Inc. say pressure is growing on the government to slow the yuan's advance to help exporters, fund managers counter that doing so will only cause inflation to accelerate from February's 11-year high of 8.7 percent. Wuhu Dayi Sports Goods Co., which had forecast a boom in shuttlecock shipments before Beijing's Olympic Games open on Aug. 8, said sales have instead fallen 30 percent this year.
``I have used the weakness to double up my position,'' said Edwin Gutierrez, a money manager who invests $5.5 billion in emerging market debt in London for Aberdeen, Scotland's largest independent money manager. ``The exporters who are finding it difficult to compete are ones which the Chinese authorities don't mind seeing go bust. This isn't the future for China.''
Yuan Stalls
The yuan has gained 1.1 percent against the U.S. currency this quarter, to 6.9366 per dollar, following a 4.2 percent climb in the first three months of the year.
As the currency's advance stalled, the 12-month yuan non- deliverable forward contract slumped to 6.4795 from as high as 6.2755 on April 7. The contract rose 2 percent last week. Forwards are agreements to buy and sell assets at current prices for delivery at a specified time and date. Non-deliverable contracts are used for currencies that can't be freely converted and are settled in dollars.
Pictet, part of Switzerland's largest privately held bank for the wealthy, forecasts the yuan will rise an additional 5 percent to 6.6 per dollar this year, higher than the median forecast of 6.65 by 27 analysts surveyed by Bloomberg.
Since China scrapped a decade-long link of about 8.3 to the dollar almost three years ago, the currency has risen 19 percent as increased exports drive the nation's trade surplus to a record and overseas investors buy Chinese stocks and property.
Foreign-exchange reserves surged 40 percent to $1.68 trillion in March from a year earlier, flooding the economy with cash and fueling inflation.
Weakness `Overdone'
The U.S. Treasury said in a semiannual report on May 15 China needs to maintain the pace of yuan gains to curb inflation and ``rebalance its economy'' by spurring domestic demand. Treasury Secretary Henry Paulson will host a Chinese delegation in Washington next month for talks on exchange-rate policy.
``Inflation will be the main concern for Chinese authorities,'' said Wee Ming Ting, a bond fund manager and head of Asian fixed income in Singapore for Pictet, which oversees the equivalent of $136 billion. ``Weakness in the forward market is overdone. We took the opportunity to add to our position.''
The dilemma facing Chinese officials is that exports are slowing because of the currency's strength. Overseas sales grew 22 percent in April from a year earlier, down from 31 percent growth in March. A third of the manufacturers in Guangdong province -- which produces 30 percent of China's exports -- will be closed in three years, according to an April 29 report by Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong.
Another `Disappointment'
Wuhu Dayi, which supplies shuttlecocks for badminton tournaments across Asia, expects 10 to 20 manufacturers in its industry will go bankrupt this year because of the yuan's gains and a doubling in labor costs in three years, said Zhang Huizi, a sales manager at the Wuhu, Anhui province, company.
``Three months away from the Olympics and we are under huge pressure just to survive,'' Zhang said. ``Everyone said it's a big year for us, but it turned out to be another year of disappointment.''
China may slow appreciation before the Olympics to avoid ``bankruptcies and unemployment, which could lead to social unrest,'' said Shen Minggao, an economist in Beijing for Citigroup, the fourth-biggest currency trader.
Citigroup and Deutsche Bank, the largest trader, forecast the yuan will end the year at 6.7 per dollar, weaker than the median forecast.
Consumers to Rescue
Consumer spending, bolstered by the Olympics, may help offset a slowdown in exports, according to Chia Liang Lian, who oversees $10 billion of Asian bonds and currencies for Pimco. China's retail sales rose 22 percent last month from a year earlier, the most since at least 1999, led by television sales, according to the state statistics bureau.
``The long-term trend for the yuan to appreciate remains intact,'' said Lian, who is based in Singapore. ``Policy makers have both the will and wallet to pump-prime if necessary.''
Chinese companies are satisfying local demand for ``high- end'' products such as computers and cars that the nation has traditionally imported, bolstering the trade surplus, Lian said.
Geely Automobile Holdings Ltd., the Chinese maker of $5,000 compact cars, has exported 14,000 vehicles to the Middle East, Africa, Russia and Ukraine so far in 2008, compared with 20,000 for the whole of last year, said Dai Yang, vice president of international business at the Hong Kong-listed company.
``The yuan's appreciation doesn't have much impact on our exports,'' he said. ``The government wants to change China from the world's factory to a country with its own intellectual properties and international brands.''
