Continued yuan appreciation is no longer such a sure thing
It looks likely that one day the yuan will become too strong for China's economy to bear and will lead to a depreciation of the currency
In an age of uncertainty, one of the few apparently safe bets has been that China's currency, the yuan, will continue to appreciate in value.
After all, despite a modest slowdown, China is still growing at a much faster pace than any other major economy. And as members of the US Congress keep telling us, the yuan is fundamentally undervalued, and really ought to strengthen.
Many people in Hong Kong seem to agree. At the end of last year the city was sitting on a record 860 billion yuan (HK$1.1 trillion) in Chinese currency deposits. Of that amount, 151 billion yuan was locked up in time deposits - a clear play on continued appreciation.
Recent history supports their view. In 2011 the yuan climbed by 4.7 per cent against the US dollar. In 2012 it rose 1.2 per cent and last year it finished 2.9 per cent higher.
An unspectacular performance perhaps, but compared to the 0.2 per cent interest rate you can earn on a 12-month Hong Kong dollar fixed deposit, the yuan has offered attractive returns.
Yet anyone currently considering buying yuan in expectation of even more appreciation might like to think again. There are growing signs that the currency is getting overvalued, and that it may be primed for a fall in the future.
Working out the fair value of any currency is notoriously tricky. For the yuan, which is still subject to restrictions on its convertibility, it is doubly difficult.
But we can still get a good general idea of whether the currency is undervalued or overvalued.
At the end of 1993 Beijing devalued the yuan by a third against the US dollar. Most economists agree that before the devaluation the yuan was overpriced. No one disputes that afterwards it was deeply underpriced.
As a result, we can reckon that a devaluation roughly half as great back at the end of 1993 would have put the yuan somewhere close to its fair value against a broad basket of other currencies.
In the intervening years, the Chinese currency has strengthened significantly, both in nominal terms, and in real terms, which factor in inflation.
As the chart shows, over the last 20 years the yuan has climbed by some 50 per cent in real terms against a basket of currencies compared with its December 1993 fair value.
That far outstrips the performance of any other major currency. The US dollar, for example, has slipped by about 7 per cent, while Japan's yen has fallen 40 per cent.
Some yuan outperformance is only to be expected, simply because of the growth differentials. But in the last few years the yuan's rise has really taken off, pushing it far above the currencies of China's trading partners and competitors.
In the real world, that appreciation has severely eroded China's competitiveness. According to some estimates, once you factor in differences in worker productivity, the combination of yuan appreciation and domestic wage inflation has now entirely eliminated the cost advantage of manufacturing in China rather than the United States.
There are still good reasons to make things in China, including the cluster effect of local suppliers.
Even so, the yuan's real appreciation has badly dented Chinese corporate profits. It is no accident that Foxconn, famous for assembling Apple's consumer electronics products in Shenzhen, is now planning to open factories in the US.
For the time being the yuan will continue to strengthen, partly because Beijing has opened the door to inward investment while restricting capital outflows.
But at some point the pain of yuan appreciation will get too much for China to bear. Either Beijing will deliberately massage the currency lower, or it will allow Chinese savers greater freedom to invest abroad.
Either way, the yuan's strengthening trend will reverse.