As fears of a global currency war grow, all eyes in Asia are on whether China will devalue its currency to avert a sharper economic slowdown.
The urgency with which Asian central banks are cutting interest rates is an indication of not just the deflationary forces they are seeing but also recognition that if China weakens the yuan, their policy options will be severely limited.
Indonesia was the latest to surprise investors on Tuesday with a rate cut, joining Singapore, India and China, all of whom have unexpectedly eased policy this year to spur growth.
Indonesia has a weakening currency and inflation that is falling but still elevated. Yet Tuesday’s move hinted at an urgency to act before two major risks play out: a spike in US bond yields or a sharp weakening of the yuan.
Both scenarios could cause steep falls in the Asian currencies and a flight of foreign capital.
While the jury is out on when and how fast the US Federal Reserve will raise rates, the odds of China weakening the yuan are growing, albeit from very low levels.
“It’s no longer inconceivable that China will go for a weaker currency,” said Frederic Neumann, HSBC’s co-head of Asian economics research based in Hong Kong.
Deflationary pressures in China are stoking expectations that it could follow Japan and other European nations by easing policy to put a floor under domestic prices, he said. Such moves have triggered major weakening in the yen, euro and other currencies.
“China could throw a spanner in the works for central banks looking to ease policy. They may have to stem currency weakness by keeping rates higher than otherwise would be, and that should be a major dampener on growth because these economies are highly dependent on credit to drive consumption,” Neumann said.
China justifiably can weaken the yuan, which has appreciated considerably in trade-weighted terms in the past year. Consumer inflation in the world’s second-largest economy is at a five-year low, while factory deflation is deepening.
A weaker yuan would help prop up export earnings, boosting growth and creating jobs in an economy that grew at its slowest pace in 24 years last year.
Yet there are equally compelling reasons for China to keep the yuan stable. Capital outflows can be destabilizing, cause property prices to collapse further and trigger a vicious cycle of bad debts and defaults in its vast shadow banking sector.
The yuan has fallen 2.3 percent against the US dollar since November, less than most other Asian currencies. In comparison, the Indonesian rupiah has dropped nearly 6 percent in that period.
Analysts at Bank of America Merrill Lynch said a yuan devaluation is still just a tail-risk, meaning it has very low odds, but they estimated market pricing showed a 30 percent probability of a 10 percent devaluation of the yuan this year.
The sizeable depreciation premium in onshore yuan and offshore yuan forwards suggested the yuan “is viewed as facing clear and present risk of competitive devaluation,” their strategist Claudio Piron wrote in a note to clients.
With most Asian countries either selling their exports to China or competing with the Chinese for a share of declining global demand, the race to have competitive currencies could become intense.
Piron estimates the Philippine peso, the Thai baht, the Singapore dollar and the rupiah are most at risk because of their being overvalued in trade-weighted terms relative to history, while the New Taiwan dollar and Indian rupee are less so.
Still, analysts reckon things would get ugly only if China makes some kind of dramatic move, such as shifting its mid-point sharply weaker or moving away from shadowing the US dollar to tracking a more broad basket of currencies. That could spark currency volatility and weakness, massive capital outflows and force them to raise rates.
“China’s currency has become an anchor for the region and we just hope the Chinese will not throw the anchor overboard and cut everyone loose,” Neumann said. “We’d be exposed in the currency storm that follows and that could be quite a bumpy ride.”
Taiwan Transport and Storage Corp (TTS, 台灣通運倉儲) yesterday unveiled its first electric tractor unit — manufactured by Volvo Trucks — in a ceremony in Taipei, and said the unit would soon be used to transport cement produced by Taiwan Cement Corp (TCC, 台灣水泥). Both TTS and TCC belong to TCC International Holdings Ltd (台泥國際集團). With the electric tractor unit, the Taipei-based cement firm would become the first in Taiwan to use electric vehicles to transport construction materials. TTS chairman Koo Kung-yi (辜公怡), Volvo Trucks vice president of sales and marketing Johan Selven, TCC president Roman Cheng (程耀輝) and Taikoo Motors Group
Among the rows of vibrators, rubber torsos and leather harnesses at a Chinese sex toys exhibition in Shanghai this weekend, the beginnings of an artificial intelligence (AI)-driven shift in the industry quietly pulsed. China manufactures about 70 percent of the world’s sex toys, most of it the “hardware” on display at the fair — whether that be technicolor tentacled dildos or hyper-realistic personalized silicone dolls. Yet smart toys have been rising in popularity for some time. Many major European and US brands already offer tech-enhanced products that can enable long-distance love, monitor well-being and even bring people one step closer to
RECORD-BREAKING: TSMC’s net profit last quarter beat market expectations by expanding 8.9% and it was the best first-quarter profit in the chipmaker’s history Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), which counts Nvidia Corp as a key customer, yesterday said that artificial intelligence (AI) server chip revenue is set to more than double this year from last year amid rising demand. The chipmaker expects the growth momentum to continue in the next five years with an annual compound growth rate of 50 percent, TSMC chief executive officer C.C. Wei (魏哲家) told investors yesterday. By 2028, AI chips’ contribution to revenue would climb to about 20 percent from a percentage in the low teens, Wei said. “Almost all the AI innovators are working with TSMC to address the
Malaysia’s leader yesterday announced plans to build a massive semiconductor design park, aiming to boost the Southeast Asian nation’s role in the global chip industry. A prominent player in the semiconductor industry for decades, Malaysia accounts for an estimated 13 percent of global back-end manufacturing, according to German tech giant Bosch. Now it wants to go beyond production and emerge as a chip design powerhouse too, Malaysian Prime Minister Anwar Ibrahim said. “I am pleased to announce the largest IC (integrated circuit) Design Park in Southeast Asia, that will house world-class anchor tenants and collaborate with global companies such as Arm [Holdings PLC],”