Monday, June 28, 2010

A new chapter opens for the yuan

Reading between the lines:

There is a famous Chinese quote: "The world under heaven, after a long period of division, tends to unite; after a long period of union, tends to divide."

floating, there is pressure for it to become pegged; once pegged, there is pressure for it to float.

The latest chapter of this story arrived a fortnight ago when the Chinese abandoned their two-year policy of fixing the yuan at 6.83/dollar.

This immediately led risk appetite to surge, the dollar to fall, and commodities to rise. However, initial market excitement soon dissipated, with uncertainty about what China's move means.

In particular, while there are some similarities to when China de-pegged its currency in July 2005, there are key differences as well.

Back then, there was an immediate revaluation of 2 per cent, and a further three years of a consistent 19-per-cent rise. Now, while most analysts expect the yuan to appreciate, the path will likely be two-directional, and the pace will be much slower.

The yuan is being managed against a basket of major currencies. Therefore, if for example euro were to weaken significantly against the dollar, then so might the yuan.

China's trade surplus is falling, and the global economy remains fragile. Hence, Beijing is not likely to allow currency movements to harm its exporters - which means there should be a limited direct effect on Thailand's own competitiveness.

The implications for Thailand are indirect, but should be positive.

First, the move means there should be less intervention by the Chinese, which will reduce pressure on other Asian central banks. This would make it easier for the baht to move in line with our regional counterparts.

Second, the move implies that China has confidence in its economy. If this is borne out, and growth continues without shocks, this would be a positive factor for growth across Asia.

Parson Singha is chief markets strategist in the Global Markets Department of HSBC Thailand.

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