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Revalued yuan brings deluge of cash

International investors are betting that Asia's economies will get a lift from China's move last month to revalue its currency, the yuan, perplexing those analysts and economists who had argued that the shift would not have much effect.

In the last month, foreign investors have poured almost US$6 billion into Asia's stock markets, with US$1.2 billion entering last week, according to Nomura International, which tracks foreign trading data from Taiwan, South Korea, India, Thailand, Indonesia and the Philippines. That does not include the deluge of cash that analysts say is flowing into Hong Kong, Singapore and Malaysia, which do not disclose data on foreign trading.

According to Emerging Portfolio Fund Research in Cambridge, Massachusetts, equity funds dedicated to Asia outside Japan received US$370 million in new investments the week after China's revaluation and another US$471 million the week after that.

That money is being spread far and wide. In the first week this month, foreign fund managers bought US$519 million worth of stock in Taiwan, according to Nomura. They bought US$244 million worth of stock in Indonesia, a market roughly one-sixth the size of Taiwan's.

"It's the relative-competitiveness angle," said Chua Hak Bin, an economist at DBS Bank in Singapore. "If China has a currency that is going to appreciate, then your currency becomes more competitive relative to China and your exports should do better."

So Taiwan and Thailand, whose electronics exports compete with those from China, would seem poised to benefit from a higher yuan. The same goes for South Korea, which competes with China not only in electronics, but also in steel and other areas.

But there is another rationale. The higher yuan means that Asia's other currencies will also rise, so foreign investors who buy stocks denominated in those currencies stand to see a return even if stock prices go nowhere. Before China's revaluation move, most Asian central bankers, seeking to maintain their nations' competitiveness against Chinese exports, were working hard to keep their growing trade surpluses from pushing their own currencies higher.

Rising currencies would tend to cancel out any additional export competitiveness gained as a result of the yuan's rise, however. Indeed, most Asian currencies have appreciated since China's move, including the ringgit, which Malaysia allowed to float freely after having pegged its value to the US dollar since 1998.

And higher currencies are only part of the reason for some to invest in Asian markets.

"The currencies will appreciate, the economies are getting better, the valuations are not expensive, and there's a global liquidity surge caused by the US trade deficit," said Richard Duncan, the author of The Dollar Crisis.

Duncan said that the surge in foreign investment was only a continued side effect of the imbalance in global funds caused by an overvalued dollar. So long as Asian currencies do not appreciate to correct the region's yawning trade surplus with the US, its central banks will continue to recycle dollar earnings by buying US debt, keeping interest rates in the US artificially low and financing continued American purchases of Asian goods, perpetuating the region's export engine.

Many economists said that China's decision to move the yuan 2 percent higher against the US dollar and to begin using a basket of currencies to determine its target value, in place of the dollar peg, would do little to reverse this cycle. And the recent inflows of foreign funds into Asia's stock markets are only part of a buying binge that has put more than US$20 billion into the region's markets so far this year, the biggest influx since at least 2000.

As Duncan said, despite this huge influx of investment, many Asian stocks still look cheap relative to corporate earnings, because of growing exports and low interest rates. So in many markets, speculation about the effect of a higher yuan is by no means the only thing driving prices higher. And in some, analysts say, the higher yuan may have little impact, or even a negative one.

India, for example, does not compete with China for exports and so is unlikely to see much of an effect, yet it has experienced a rise in foreign buying since China's revaluation. Taiwan, which saw so much foreign money come in, has moved so much of its manufacturing to China that analysts say the higher yuan may actually hurt corporate profits there.

Indonesia competes with China in textiles and it exports raw materials to China, so a more expensive yuan could help Indonesia sell more clothes and enable China to buy even more wood, palm oil and natural gas. The bid by CNOOC for the US oil company Unocal, though unsuccessful, also signaled a Chinese desire to invest in natural resources in Indonesia, where many of Unocal's gas reserves are, analysts say.
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