MonitorHigh time to reconsider your yuan investments
Beijing to come under pressure to devalue if the US dollar jumps, which may happen as quantitative easing is increasingly seen as a success
Unnerved by the volatility in financial markets last week, two readers asked Monitor whether it was time to get out of their yuan-denominated investments.
At first it might seem strange that an abrupt correction in the Japanese stock market, which fell 7 per cent on Thursday, should prompt people to question the outlook for the yuan, which has climbed 2 per cent against the Hong Kong dollar so far this year and offers a superior yield.
But look more closely at what's been going on in financial markets and it becomes clear our readers are asking an excellent question.
Although commentators have pointed their fingers at half a dozen possible triggers for last week's slump in Japanese stock prices, the underlying reason for the fall was that a correction was long overdue, given it had shot up 67 per cent in just six months.
Behind the scenes, however, the doubling of Japanese government bond yields over the last six weeks indicates a growing belief among investors that the Bank of Japan's money printing efforts will succeed in weakening the yen enough to lift Japan out of deflation.
In other words, people are now accepting that competitive devaluation works.