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.