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Goldman bets against yuan as China slowdown spurs outflows

[HONG KONG] Goldman Sachs Asset Management has been betting against the Chinese currency as a slowdown in the world's second-largest economy spurs capital outflows.

"We've been short the yuan for several months," Yacov Arnopolin, who helps oversee about US$39 billion in emerging- market debt as a managing director at Goldman Sachs Asset, said in a March 16 interview in New York.

"It's certainly difficult to continue the strengthening trend in the face of the slowing economy. It's a challenging time."

The yuan has fallen 0.4 per cent against the greenback this year, following a 2.4 per cent drop in 2014 that was the first annual decline in five years. Premier Li Keqiang has set China's 2015 economic growth target at 7 per cent, the least in more than 15 years.

The risk of the yuan weakening further and prompting more outflows makes it difficult for China to keep cutting interest rates to spur expansion. Premier Li told reporters in Beijing on March 15 that policy makers will act if growth drifts toward the lower limit of its range and cuts into employment or wages.

Yuan positions for foreign-exchange purchases at Chinese financial institutions, a gauge of capital flows, fell 108.3 billion yuan (S$24.42 billion) to 29.3 trillion yuan in January, the lowest in a year. That followed a drop of 118.4 billion yuan in December, signaling the biggest outflow since 2007. The positions increased 42.2 billion yuan in February, the central bank reported on Wednesday.

While the yuan has weakened against the greenback and Taiwan's dollar this year, it has advanced against all of the 15 other major currencies tracked by Bloomberg. More than 20 monetary authorities from Australia to South Korea have cut interest rates in 2015, while the European Central Bank has started record monetary stimulus and the Bank of Japan has maintained unprecedented asset purchases.

"If your export competitors are devaluing, there's inevitable pressure for you to do the same," Mr Arnopolin said. "I'm not going to forecast a 5 per cent devaluation, but one can't rule out the potential widening of the yuan's trading band."

The yuan in Hong Kong fell the most in two weeks on March 13 amid speculation China will expand the currency's daily trading range from 2 per cent. A wider band would give the yuan more room to weaken.

There isn't an "urgent need" to widen the currency's trading limit, People's Bank of China Deputy Governor Yi Gang said March 3. The yuan is stable compared with other currencies and its moves are normal, PBOC Governor Zhou Xiaochuan said in Beijing last week.

The government will press ahead with its anti-corruption campaign, Premier Li said March 15. China is also promoting domestic consumption to make its economy less reliant on exports.

"Everything that's being put in place on a three to five to 10-year horizon, I believe is very positive, such as the drive against corruption," Mr Arnopolin said. "Near term, that's anti-growth because you see capital outflows accelerating. The whole conversation about more consumption and less investment implies a similar story: more imports, which is detrimental to growth as well."


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