Asia embraces new landscape after China's currency move

Asia embraces new landscape after China's currency move

Karl Malakunas, Agence France-Presse/Singapore

Asia embraced a new financial landscape on Friday after China
finally abandoned its decade-old peg to the dollar, with regional
governments and analysts widely applauding Beijing for the move.

Asian currencies were uniformly tipped to appreciate in the
long-term following China's announcement on Thursday that it had
abandoned the yuan peg for a managed float against an undisclosed
trade-weighted basket of currencies.

The region's economic growth rates were also expected to get a
boost, according to analysts who further predicted China's move
would inevitably be the start of a long process of the yuan
regime becoming more flexible.

The most immediate impact came in Malaysia, which announced
virtually straight after China Thursday that it had scrapped the
ringgit's seven-year-old peg to the dollar in favor of a managed
float.

"Do not underestimate the significance of a new currency
policy for China," JPMorgan equities strategist Adrian Mowat
said.

"An appreciating renminbi would accelerate the current trend
of appreciating Asian currencies while boosting the region's
reflating economies.

"Strong currencies should attract capital and discourage the
export of savings, adding to demand for Asian assets."

The yuan, or renminbi, was revalued at 8.11 to the U.S. dollar
compared to 8.28, a 2.1 percent revaluation.

It will be allowed to trade 0.3 percent either side of a daily
fixed rate and trade in a managed float against a basket of
trade-weighted currencies.

The move came after sustained pressure from the United States
and other Western nations worried about China's perceived trading
advantage with an artificially weak currency unfairly boosting
the nation's exports.

Japan, the largest economy in Asia and China's biggest trading
partner, was one of the first to urge still greater yuan
flexibility, while welcoming the first step.

"A shift to a basket-trading system of the Chinese yuan is
positive for the Chinese and global economies," Minister for
Economic and Fiscal Policy Heizo Takenaka told a press
conference.

"While the movement of the Chinese yuan is expected to be
limited in the near-term after the introduction of the new
trading system, it will affect corporate as well as the export
activity of Japan in the mid- to long-term."

Japan's Chief Cabinet Secretary, Hiroyuki Hosoda, said Tokyo
"would welcome it if the yuan becomes more flexible" and Takenaka
expressed similar sentiments.

"We will be watching closely whether the Chinese monetary
authorities manage the currency trading system more flexibly and
in a more market-driven fashion in the long-term," Takenaka said.

Economists were in no doubt China will loosen the peg further
-- the question only being when.

"(China) will eventually have to allow bigger movement
flexibility for the exchange rate to reflect changes in the
underlying currency basket," DBS greater China analyst Chris
Leung said.

"I believe the next step will be the adoption of a wider
trading band."

Other governments around the region welcomed China's
revaluation, although they also emphasized that the 2.1-percent
appreciation in itself would not have a major initial impact.

"I think it's a positive development because greater
flexibility allows the adjustments across economies to be made
through a more flexible pricing structure," the managing director
of Singapore's central bank, Heng Swee Keat, said.

"In the long-term within Asia, it gives us a better buffer to
absorb any sort of external shocks so those are positive
developments for Asian economies and the world economy."

Australian Trade Minister and acting Prime Minister Mark Vaile
said China's decision was "good for Australia's exports and
international markets.

"China is Australia's second largest export market and the
revaluation of the renminbi will make Australian exports cheaper,
having a positive impact especially on resources and agriculture
products," Vaile said.

In Malaysia, the business community said the yuan-triggered
revaluation of the ringgit was an important step in making the
Southeast Asian nation a more attractive destination for
investors while helping the local economic liberalization
process.