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July 30, 2007

Investors betting big on yuan appreciation

Investors from California to Singapore are making a big bet that China will have to appreciate the yuan

Rajeev De Mello, who helps manage $600 billion as head of Western Asset's Singapore office, says the currency may climb 6.4 percent this year to 7.11 to the dollar as the government attempts to restrain the world's fastest-growing major economy.

``The yuan is going to be stronger,'' said De Mello, who plans to start buying the forwards. ``I don't believe that China will tolerate high inflation.''

One-year non-deliverable yuan forwards jumped 1.6 percent to 7.1475 per dollar this month. The contracts are agreements in which assets are bought and sold at current prices for delivery at a later specified date. A non-deliverable forward is typically settled in U.S. dollars and involves no physical exchange of other currencies.

The yuan has appreciated 5.6 percent to 7.5674 against the dollar since Paulson, 61, took office on July 10, 2006. The British pound rose almost twice as much, though the pace of growth in the U.K. is about a quarter of China's 11.9 percent.

Western Asset Management Co. in Pasadena and Pictet Asset Management in Geneva are buying contracts tied to the future value of the yuan, driving the price so high that the currency must strengthen at least 5.5 percent in the next 12 months before they see any profit. The so-called non-deliverable forwards are rising at the fastest pace in two years.

China may let the currency strengthen 3.5 percent in a single step this year to cool ``overheating politicians in Washington'' as much as the economy, said Glenn Maguire, chief Asia economist in Hong Kong at Societe Generale SA, France's second-biggest bank. He also predicts deposit rates will rise ``substantially.''

Goldman Sachs Group Inc., the world's largest securities firm by market value, recommended buying two-year non- deliverable forwards as one of its top 10 trades for 2007, because the contracts only priced in annual appreciation of 4 percent.

China's foreign reserves total $1.33 trillion.


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China may have a one day 3.5% appreciation of the yuan

Appreciation of the yuan and continued strong economic growth in China are central to my thesis that the Chinese economy will pass the United states economy on an exchange rated basis by 2020 I now think that there is a greater than 50% chance that this could happen by 2015-2018 based on the faster appreciation of the yuan and weakness in the US economy.

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