Asia prepared for yuan revaluation, analysts say

DOLLAR PEG: Control mechanisms which were adopted after the 1997-1998 crisis will enable economies in the region to deal with a stronger yuan, economists predict


Wed, May 18, 2005 - Page 11

Asian countries are better prepared to absorb the impact of any revaluation of the Chinese yuan after the bitter experience of the 1997-1998 regional financial crisis forced them to strengthen their economic management systems, analysts said.

"Any impact of a yuan revaluation is expected to be minor," Asian Development Bank (ADB) chief economist Ifzal Ali told reporters.

Ali said it was highly unlikely a revaluation of the yuan would trigger another regional currency meltdown as financial systems were stronger, a surveillance mechanism was in place and macro-economic management had improved.

He said there was now also greater regional financial cooperation and Asia's combined international reserves, excluding those of China and Japan, had built up to US$1 trillion.

"In that sense, developing Asia has internalized the lessons of 1997 and that's what gives me confidence that they will be able to respond to any unexpected shock with poise," Ali said.

Ali also emphasized that any appreciation of the yuan would make the exports of other Asian countries more competitive.

"Some of the Asian countries with strong trade relations with China are likely to gain, but this will have to be compensated by any possible decline in China's growth as a result of a revaluation of their currency," he said.

China, which serves as a global manufacturing base, is a major importer of Asian products, which it repackages as finished goods for export to the US and other markets.

The yuan's peg to the US dollar, currently fixed at 8.28, has increasingly come under pressure from the US and other trading partners who argue China's exports are unfairly cheap thanks to an artificially weak currency.

Asked whether a revaluation would be good or bad for Asia, Standard Chartered Bank economist Joseph Tan said it would depend on how large the change was.

He said his expected scenario of a 3.0 percent appreciation would be insignificant and while Asian currencies would strengthen in line with the yuan, the impact on exports should be limited.

"Bearing in mind that the entire region will have to strengthen against the dollar ... the region does not lose relative competitiveness among itself," Tan said.

"The trend is such that Asia is exporting to the rest of the world with different products coming from different regions. We don't see [stronger currencies] affecting the trend of trade," he said.

Julian Jessop, chief international economist of London-based consultancy Capital Economics, who is expecting a 5.0 percent appreciation of the yuan, said Asian economies were resilient.

"This sort of currency move alone would not have any major impact on other regional economies and is certainly trivial compared to the disruption caused by the Asian crisis," he told reporters.

"In general, anything that contributes to a more market-oriented financial system in China is good for the Chinese economy and therefore good for Asia as a whole," he said.

Jessop said a yuan revaluation could have a "significant negative impact" if there were "knock on effects on the financial markets" as a result of Asian central banks investing less in US treasuries.

This scenario could cause a sharp rise in US interest rates and so damage the US economy, which would then buy less exports from Asia, but Jessop said fears that this will happen are "exaggerated."