The renminbi has steadily appreciated and, while analysts urge investors to be cautious, it is undervalued and there may soon be a one-off revaluation Buying yuan may not be the investment that first springs to mind. Yet, since its peg of 8.28 to the US dollar was lifted on July 22, 2005, the yuan has slowly and steadily appreciated. By August11 this year, the yuan had strengthened to 6.86 to the US dollar - a gain of 20.7per cent. Even with withdrawals capped at 20,000 yuan a day and bank deposit rates for the yuan around 0.57 to 0.7per cent, money is still pouring in. In February 2004, when banks in Hong Kong were first permitted to offer yuan deposits to retail customers, the Hong Kong Monetary Authority listed deposits of 895 million yuan. By early June this year, that figure had reached 77.64 billion yuan. From May last year to this year, yuan deposits nearly tripled, increasing from 27.156 billion to 77.675 billion. It's probably no coincidence that the yuan also appreciated at its fastest rate during that period, from 7.69 to the US dollar in May last year to 6.99 this May. But the pace of deposits began slowing in June, in tandem with the slower pace of the yuan's appreciation. No one has data on who is investing in yuan, but it's believed that a wide cross-section of people - from housewives to professionals - are hoping to profit from the renminbi. What lies ahead for the yuan? The consensus is that it is headed for a period of uncertainty. For the next year, most see the yuan levelling off at about 6.6 to 6.7 to the US dollar. The reasons have as much to do with the global economy as the mainland's domestic situation. 'There have been quite significant corrections in the US and Chinese stock markets,' explains Sebastien Barbe, senior economist and strategist for Asia at Calyon Credit Agricole CIB. 'In the US, the credit crunch plus the deceleration of housing prices have caused household balance sheets to deteriorate. Europe is also decelerating strongly.' Mr Barbe blames the deceleration in China's economy on the slowdown in the growth of its exports, which depend heavily on US and European orders. In June, China's exports grew by 17.6 per cent to US$121.53 billion, much lower than May's 28.1 per cent rise, while imports increased by 31 per cent to US$100.18 billion, according to China's General Administration of Customs. Sluggish export growth and signs that inflation is cooling in China are helping to put the brakes on yuan appreciation, he says. Patrick Bennett, Asian currency and fixed income strategist at Societe Generale - Corporate and Investment Banking, says that the pace of the yuan's appreciation in the first few months of this year will not be repeated. He predicts a degree of volatility ahead for the currency. 'For investors looking to buy and hold the currency, they will be in a more difficult position because they haven't had much volatility before,' he says. The yuan is linked to a basket of currencies, and Mr Bennett believes that by next year the central government will introduce a wider allowable trading band, leading to more fluctuation in the yuan's value. 'Volatility doesn't need to be bad. It's more a case of looking for opportunity as the yuan weakens within the trading band. There will be opportunities to buy yuan,' he says. The yuan has, in fact, wobbled slightly in recent months, weakening from 6.81 on July17 to 6.85. There also remains the tantalising prospect that the mainland will allow a major one-off revaluation of the yuan in order to settle the currency issue quickly instead of in small painstaking steps. 'The yuan is still about 25 per cent undervalued, even at this time,' notes Richard Yetsenga, currency strategist at HSBC. 'The economics are relatively clear in the sense that the underlying fundamental pressure for appreciation is still there.' His forecast for the yuan, without the possible one-off revaluation, is 6.77 to the US dollar by the end of December this year and 6.33 by the end of December next year. For conservative investors, he says, the yuan offers 'very low downside risk' compared with stocks, but as with any investment, unanticipated factors, such as economic upheaval or changes in government policy, could affect the outcome. A dramatic revaluation of the currency could prove lucrative for investors. Such a possibility prompted V.Anantha Nageswaran, head of investment research for Asia-Pacific and the Middle East at Bank Julius Baer, to suggest that investors maintain their yuan holdings for the present. For Hong Kong investors, he adds that it is 'appropriate' to have a portfolio with a 10 per cent weighting in yuan. But it's not a good idea to invest additional money in yuan at this time, he says. Despite the yuan's double-digit gains over the past several years, he notes that the yuan's appreciation had paled next to other currencies, such as the Thai baht and the South Korean won. 'At its peak in 2006, the Thai baht appreciated 15.7 per cent in one year,' he says, while that same year, the yuan strengthened by only 3.4 per cent. 'In general, the yuan revaluation trade is not the most important play at this time,' he adds. Fundamentally, however, a better time might be if China acts to rebalance its economy by putting more emphasis on domestic demand than export growth. 'If China were serious about economic rebalancing, that would include a strong yuan appreciation policy,' he says. Ipac financial planning, Hong Kong recognises the appeal that the yuan has had for investors over the past year, yet actively discourages clients from directly trading currencies. 'It's a popular strategy in Hong Kong and in the past 12 months, people have profited from direct exposure to the yuan,' acknowledges ipac's senior vice-president Julian Bannigan. 'With currency trading, sometimes people are going to get it right and sometimes they're going to get it wrong. Where they end up in the long run has a lot to do with luck.' He describes currency investing as a short-term gamble instead of a well thought out, long-term investment strategy, which should have a five to 10-year time horizon. 'With currencies, it's hard to say what might happen in five to 10 years. But if you look at equities, the returns are more reliable over time,' he explains. Mr Bannigan is quick to point out that he is not averse to indirect, diversified exposure to currencies, such as the yuan, through investments in international mutual funds, Chinese companies or overseas firms which benefit from China's growth. 'We want our clients to have exposure to China because of the high rate of growth, and we don't think for a moment that China isn't going to be a great place to invest,' he says. 'But the question of currency speculation is what we have an issue with.'