Mon, Apr 19, 2010 - Page 12 News List

Yuan revaluation to benefit neighbors

WIN-WIN Analysts say a currency revaluation would boost the export industries of countries that do business with China and have little negative impact on its economy


Speculation of an imminent yuan revaluation has boosted other Asian currencies against the US dollar recently, reflecting the region’s world-leading recovery from recession, analysts said.

With a move by Beijing to let the yuan appreciate against the dollar seen as increasingly likely in the near future, emerging Asian economies that compete directly with China are in line to benefit the most, they said.

“A Chinese currency revaluation would boost the export industries of countries that have trade relations with China,” said Yunosuke Ikeda, senior forex strategist at Nomura Research Institute.

“Generally speaking it would help China’s neighbors, while having little negative impact on the Chinese economy,” Ikeda said.

Despite rising against the euro, the dollar has fallen against a basket of Asian currencies this year. It is down 4 percent against the Australian dollar, linked to a commodity-rich economy driven by Chinese demand for raw materials.

The Korean won, the Malaysian ringgit and the Indian rupee in particular have rallied strongly. The dollar is down 6 percent against the ringgit, 5 percent against the won and 4 percent against the rupee.

Asian currencies are also likely to bounce from anticipation that other Asian central banks are moving to tighten their monetary policies, unlike their counterparts in more advanced economies, analysts say.

Singapore on Wednesday revalued its currency — the city-state’s principal monetary tool — prompting speculation that China and South Korea may be next in line.

“Given this expectation, firm risk appetite and more follow-through from Singapore’s foreign exchange move, the outlook for other Asian currencies remains bullish,” Credit Agricole analysts said.

Pressure is now growing on Beijing to raise interest rates and loosen currency controls after official data showed on Thursday that the economy grew at a red-hot 11.9 percent in the first three months of the year.

The yuan was effectively pegged at about 6.8 to the dollar in the middle of 2008 as the financial crisis sank its teeth into global trade, after the unit rose by more than 20 percent since 2005 as China’s export-driven economy soared.

Having recovered from the grip of recession, Asia is now “leading the global rebound,” a recent World Bank report said. In comparison the dollar has been pressured by a series of false dawns, and markets have repeatedly seen their recovery hopes dashed by disappointing data, reducing the chances of an imminent US rate rise, economists said.

“A yuan revaluation will add to the conviction that Asia can appreciate against the dollar even in a stronger dollar environment versus the euro,” Royal Bank of Scotland analysts told Dow Jones Newswires.

However, who exactly stands to win and lose from a yuan revaluation is under debate with currencies affected differently by risk sentiment, exposure to commodities and how respective economies balance foreign reserves. The yuan’s peg against the dollar forces other export-oriented Asian economies to smooth their currencies’ performance against the greenback and, therefore, the yuan as they struggle to remain competitive. A yuan appreciation against the greenback would boost the strength of other Asian nations against China’s exporters, and reduce the need for Asian central banks to buy dollars to curb their currencies’ ascent, analysts say.

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