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Currency speculators consider the options beyond China
Published: August 5 2005 03:00 | Last updated: August 5 2005 03:00

Fund managers and currency traders had been betting for years that China would revalue its currency. The unexpectedly early - but relatively small - revaluation finally allowed some of them to take a small profit.

But it has left many investors scratching their heads about how to make money on the next move. Some have decided not to bet on China's next move at all, while others have become more creative in their investment strategies, with theories that go against market consensus.

When Beijing acted two weeks ago, most financial markets moved in the direction investors expected.

The dollar fell against some major currencies, particularly the yen. Chinese equities on the US exchanges jumped around 2 per cent as the market recognised that Chinese companies' assets would be worth more in dollar terms. And not surprisingly, peripheral Asian equity and currency markets gained.

But things have since settled, with most of the markets moving back to near their pre-revaluation levels. Those hoping to make gains from the immediate effects of the revaluation are "going to be disappointed" according to Jim Melcher, head of Balestra Capital, a New York hedge fund.

"This small upward revaluation is almost worse than no revaluation at all,"he says.

Based on that view, some fund managers have thrown in the towel, thinking China's next policy change - if there is one - will be similarly modest.

"I didn't want to invest in the renminbi six years ago and I don't want to touch it now," says Mr Melcher.

Jes Black, manager of Black Fund Capital Markets, takes a different view. First, in common with other investors, he expects other Asian currencies to rise if the renminbi is revalued again.

"The revaluation signifies a change to a fourth currency option, and just adds to the idea that investing in Asian currencies is becoming a more solid investment," he says. The three other options are US dollar, European currencies, and emerging markets plays.

Mr Black is also looking at some strong Asian equity plays, such as investing in South Korean stocks. The market's main index, which started to rise a few weeks before the revaluation, rallied above the key 1,000 level last week, and hit 1,100 on Wednesday.

In yet another theory, he is betting that the dollar will rise against the euro, a view that goes against most of the market.

Mr. Black believes that, over time, investors will gradually buy more Asian currencies at the expense of European currencies such as the euro and sterling rather than the dollar, suggesting European currencies could weaken against the greenback.

Richard Benson, founder of the Specialty Finance Group, agrees that the revaluation is a step towards a more mature Chinese economy.

He has a different theory on how investors could make some real money on further currency moves - by investing in the businesses Chinese companies might want to buy.

"There are already signs that China is trying to buy US brands, US oil companies, and almost anything that isn't nailed down around the world," he says.

He adds that owners of shares in companies that become takeover targets for Chinese companies should make money: "As an investor, shouldn't you be interested in what China wants to buy?"