Asian currencies to gain from yuan revaluation: analysts

[armondtoth]

TOKYO — Speculation of an imminent yuan revaluation has boosted other Asian currencies against the dollar recently, reflecting the region's world-leading recovery from recession, say analysts.

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 say.

"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 neighbours, while having little negative impact on the Chinese economy."

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, say analysts.

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 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 mid-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 say.

"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.

"The Malaysian ringgit and the Singapore dollar are likely to benefit most from the revaluation, " said Ikeda, adding that the ascendant Australian dollar would be likely hit by profit-taking.

For the Japanese yen, however, the picture remains clouded.

Barclays Capital said in a recent report that the Japanese currency stands to gain the most because a yuan revaluation would increase investor concerns about China's growth and demand for commodities.

Currencies with higher commodity exposure, notably Australia, would be hit while commodity-importing Japan would stand to gain.

However, the impact of a higher yen hitting the repatriated earnings of Japanese exporters obscures the issue. Japan's mountainous public debt approaching 200 percent of GDP is also a potential driver against the yen.

"It does not necessarily follow that the Japanese authorities would be more tolerant of yen appreciation against the dollar," said Julian Jessop of Capital Economics.

What is agreed is that any rate move by Beijing would be slow and gradual. The yuan would have to rise "20 to 30 percent" to have a major impact on the broader economy, said Nomura's Ikeda. "We expect China to revalue its currency at around 5 percent on an annual basis."

Copyright © 2010 AFP. All rights reserved. More »
Related articles

* Chinese president back home from BRIC summit
Xinhua - 1 day ago
* China:To Gradually Adopt Floating Exchange-Rate System Under Management
Wall Street Journal - 2 days ago
* Two Truthful Responses To Griswalds Inaccurate Commentary!
American Iron and Steel Institute - 2 days ago
* More coverage (1) »

http://www.google.com/hostednews/afp...lCcZM0IKL211-w

[ILOVEYOU!]

China under pressure; will it let Yuan rise? ...

June 12, 2010

..........................................

Like the risk-on, risk-off volatility that has buffeted global markets this year, China's currency policy has been subjected to bouts of pressure and criticism from abroad interspersed with periods of calm.

Beijing is once again facing a pressure-on phase in the cycle, as underscored by US Treasury Secretary Timothy Geithner's harsh words on Thursday about the yuan.

Here are some questions and answers at the current juncture in the long-running yuan debate.

Why is criticism of the Yuan heating up again?

In a nutshell, US domestic politics. With many US lawmakers facing re-election in November and unemployment hovering just below 10 percent, pressure is building on President Barack Obama's administration to push China to break the yuan's nearly two-year-old peg to the dollar.

Although many economists believe yuan appreciation would do little to reduce the overall US trade deficit, a vocal group of lawmakers in Washington says an undervalued currency subsidises Chinese exports at the expense of US firms and jobs.

On Thursday, Geithner struck his toughest tone since the Treasury Department delayed a report due in April in which it needed to decide whether to name China a currency manipulator. "The distortions caused by China's exchange rate spread far beyond China's borders and are an impediment to the global rebalancing we need," he told a US Senate hearing.

If the Treasury refrains from punishing China, anger in Washington may only intensify. Democratic Senator Charles Schumer said lawmakers would move forward soon with a bill that would slap anti-dumping penalties and countervailing duties on goods from China and other countries with "fundamentally misaligned" currencies.

Are the conditions right in China for appreciation?

The two chief considerations for Beijing are whether exports have recovered after last year's collapse and whether a stronger currency is needed to suppress inflationary pressure.

On the surface, the latest Chinese data argue for a stronger yuan. In May exports surged 48.5 percent year on year, while inflation hit a 19-month high of 3.1 percent. But economic facts are never so clear cut.

Inflationary pressures appear to be ebbing, with consumer prices down 0.1 percent in May compared with April. And the Ministry of Commerce, which has been the most steadfast opponent in the Chinese government of a stronger yuan, believes that exports were flattered by a low base of comparison and have yet to feel the brunt of the European debt crisis.

"Normally, it takes about three months for exports to go from order to shipment and finally to settlement. At present, transactions are still based on orders made in February or March," Huo Jianguo, head of the ministry's think-tank, said. "We forecast that the impact of the crisis will become clear only in the third quarter," he said.

How do rising labour costs fit into the picture?

A rare burst of labour unrest in China has halted production at a series of factories, including Honda parts suppliers, and stoked concerns about rising wage costs in the world's largest exporting nation. Even if there is no nominal appreciation (ie the yuan's exchange rate remains frozen), higher wages would, in theory, make Chinese goods more expensive in global markets and hence constitute real appreciation.

Factory strikes are a new development in China, but labour costs have in fact been rising steadily over the past decade. Wages in the manufacturing sector rose 14.5 percent per year from 2004 to 2008 and 13 percent annually in the five years before that, according to UBS estimates.

Relatively stable profit margins and export prices indicate that productivity gains have largely offset higher wages so far. This could change, at least in the short run, with some firms like contract electronics manufacturer Foxconn talking about doubling wages. But labour typically makes up perhaps 5-8 percent of production costs in China's manufacturing sector, meaning that final prices need not increase much at all.

The upshot is that wage increases are, for now, no substitute for yuan appreciation. But they do give Beijing one more reason for caution in its management of the currency. Zhang Xiaoji, head of international economics in the Development Research Centre, a think-tank under the cabinet, noted in an official newspaper on Friday that rising labour costs would squeeze exporters' profit margins.

Will US pressure delay Yuan appreciation?

China has repeatedly insisted that foreign criticism is not conducive to a resumption of yuan appreciation, and it appeared to dig in its heels earlier this year when calls from the United States and the European Union were especially loud.

With the euro zone debt crisis taking centre stage over the past two months, complaints about yuan policy have faded away. Some said this presented Beijing a window of opportunity, because it would not appear to be bowing to outsiders.

Many think that the window will be smaller, if not totally shut, as US pressure flares up again. "One thing is for sure: Schumer's trouble-making won't shake China's determination to promote reform of the yuan's exchange rate regime or the pace of that reform," He Weiwen, an economics professor at the University of International Business and Economics in Beijing, wrote in an official newspaper on Friday.

At any rate, investors expect the yuan to rise just 1.03 percent versus the dollar over the next 12 months, according to pricing in the offshore forwards market. Earlier this year, markets had been pricing in expectations of a more than 3 percent rise.

http://economictimes.indiatimes.com/News/articlelist/1715249553.cms

related articles ~
Treasury Secretary Geithner says China could become largest foreign market for US exports - Delayed currency report after G20 ...