Stronger Asian economies to cope with higher yuan

Stronger Asian economies to cope with higher yuan

Martin Abbugao, Agence France-Presse/Singapore

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 AFP.

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 added there was now also greater regional financial
cooperation and Asia's combined international reserves, excluding
those of China and Japan, had built up to one trillion dollars.

"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 United States and other markets.

The yuan's peg to the U.S. dollar, currently fixed at 8.28,
has increasingly come under pressure from the United States 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."

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
AFP.

"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."

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
U.S. treasuries.

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

Henderson Global Investors said in a report a revaluation of
the yuan of 5.0 percent would have a limited impact on Asian
currencies but a rise of around 15 percent would put strong
pressure on them to also rise.

Henderson said the strongest pressure would potentially be on
the Malaysian ringgit, which has been pegged at 3.8 to the U.S.
dollar since the Asian financial crisis.