SEA economies take yuan revaluation in stride
SEA economies take yuan revaluation in stride
Martin Abbugao, Agence France-Presse/Singapore
Southeast Asian economies have emerged unscathed two weeks after China revalued the yuan, thanks largely to Beijing's calibrated move of allowing only a modest appreciation, analysts said.
Key regional currencies have strengthened against the U.S. dollar in line with the yuan, but initial fears of disruptions in the region's financial systems have not materialized.
Analysts said the impact was exactly as China had intended: please the United States by allowing the yuan to appreciate while also making sure the increase was not drastic enough to shake up the financial landscape.
"Given that the initial move was fairly modest, we don't expect to see much significant impact in the near term," regional economist Song Seng Wun, of GK Goh brokerage, told AFP.
"At the end of the day, it is all about China needing to move (the yuan) but without really having to move too much.
"They want to ensure that the impact on domestic businesses and trading partners will be minimal. They did not want to create sharp risks and destabilize economic activities."
Washington had put intense pressure on China to allow the yuan to seek its true level, saying it was grossly undervalued, making Chinese exports unfairly cheaper in the global market.
After months of speculation, China on July 21 freed the yuan from an 11-year-old peg to the U.S. dollar in favor of a trade- weighted basket of currencies.
Monetary authorities allowed the yuan to appreciate 2.1 percent to 8.11 to the dollar but kept details of the currency basket unclear to protect it against speculators.
The new managed float for the yuan can in theory allow for a 0.3 percent daily shift in either direction to what the market deems fair value.
While pressure for a stronger yuan has not disappeared, China has made it clear it will set the pace of any further revaluation, analysts said.
Henderson Global Investors said in a report the impact of China's move may be small for the near term, but in the longer term it could erode support for the dollar because the Chinese government had been previously supporting the U.S. unit.
"With the floating peg exchange rate structure, there will be less support from the Chinese government in this scenario which leaves the dollar more vulnerable if it begins to slide," the report said.
Perhaps the most notable impact of China's move was Malaysia's decision -- also on the same day -- to unhinge the ringgit's peg to the dollar imposed by maverick Prime Minister Mahathir Mohamad at the height of the 1997 Asian financial crisis to battle speculators.
By late Friday, the ringgit was at 3.7464 to the dollar, up 1.4 percent since the peg was scrapped.
"By and large, the ringgit revaluation is positive in the sense that while allowing for the predictability of the ringgit, it is a managed float," said Andy Ong, head of research at HLG Securities in Kuala Lumpur.
Ong said it was still too early to determine the full impact of the yuan revaluation, but noted that there had been so far no drastic appreciation of regional currencies.
"We will just have to wait and see. Judging from what we have been seeing, we won't see strong fluctuation."
The Philippine peso was the only key Southeast Asian currency to have fallen since July 21. Analysts said the currency's fate is more dependent on the political fortunes of President Gloria Arroyo than on the yuan.
"The Philippines is a relatively small beneficiary of the revaluation given its weak linkages to China in terms of share of exports to China. Investment and tourism receipts from China are also not very significant," said economist Euben Paracuelles of DBS Bank in Singapore.
At the close of business on Friday, the Indonesian rupiah was up 0.91 percent against the dollar from July 21 at 9,745, the Thai baht strengthened 0.17 percent at 41.1900 and the Singapore dollar advanced 1.88 percent at 1.6523. The peso was down 0.31 percent at 55.915.
Philip Wee of DBS Bank expects pressure on China to further revalue the yuan will return next year after the U.S. monetary authorities are done with raising interest rates and as momentum builds ahead of mid-term U.S. elections.
"China needs time for its economy to adjust to the new exchange regime," Wee said.
Julian Jessop, chief economist of London-based consultancy Capital Economics, warned speculators that Beijing had enough ammunition to defend the yuan.
"The Chinese authorities are determined not to let speculators force their hands. They hold massive currency reserves and they are defending a currency which is not yet remotely freely convertible," he said.