Asian currencies from the won to the ringgit are luring two of the region’s largest investors on speculation China’s decision to end the yuan’s peg will increase demand in the world’s third-biggest economy.
Mitsubishi UFJ Asset Management Co., a unit of Japan’s largest bank, says Asian central banks will allow appreciation by reducing dollar purchases. AMP Capital Investors Ltd., Australia’s second-biggest money manager, predicts the region’s currencies will gain as much 15 percent in the next year as China’s move underscores the strength of the global recovery.
The yuan rose the most in five years yesterday after the central bank said June 19 it would increase the currency’s “flexibility,” scrapping a two-year peg against the dollar aimed at shielding exporters from the global financial crisis. The Bloomberg-JPMorgan Asia Dollar Index climbed 0.7 percent, the most in six weeks. Policy makers from the Philippines to Thailand said the change would spur regional trade.
“Asian central banks will probably ease their grip on intervention as competitiveness becomes less of an issue,” said Hideo Shimomura, who helps oversee the equivalent of $55.4 billion at Tokyo-based Mitsubishi UFJ Asset. “Authorities in Asia see the move as confidence by the Chinese authorities in its economic state.” Shimomura said he may add to holdings of Asian currencies including the Singapore dollar.
The yuan strengthened 21 percent in the three years before policy makers halted gains at about 6.83 per dollar in July 2008. It fell 0.2 percent to 6.8095 as of 12:36 p.m. in Shanghai after rising 0.4 percent yesterday. South Korea’s won gained 2.6 percent yesterday, the ringgit appreciated 2 percent and Taiwan’s dollar rose 0.6 percent.
China, including Hong Kong, is the biggest export market for economies such as Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.
“This is a good opportunity for Thai exports to China,” Deputy Governor Bandid Nijathaworn told reporters in Bangkok yesterday. Spencer Lin, the head of foreign-exchange at Taiwan’s central bank, said today that yuan’s appreciation “will be good for countries selling goods to its domestic market.”
The yuan policy change signals that “the recovery in the Chinese economy is on a more solid footing,” Philippine central bank Governor Amando Tetangco said in a June 20 interview. “This bodes well for intra-Asian trade and consequently growth for our economies.”
China’s central bank said it was prepared to resume appreciation because the “upturn in the Chinese economy has become more solid” and that a stronger yuan would help curb inflation. Gross domestic product expanded 11.9 percent in the first quarter from the same period of 2009.
“The move by Chinese authorities has given investors more confidence on China’s growth trajectory as it has reduced the need for aggressive tightening,” said Nader Naeimi, a Sydney- based strategist at AMP, which has more than $90 billion of funds under management in Sydney. “Asian currencies are leveraged to China’s growth profile. We are increasing our allocation.”
AMP’s favors the Taiwan dollar, the Korean won, the Singapore dollar and the Malaysian ringgit.
People’s Bank of China said that a floating exchange rate will help the nation to focus its economy on domestic demand, curb inflation and reduce trade imbalances, according to a question-and-answer document published June 20. The bank ruled out “large changes” in the exchange rate and said it will prevent “excessive” fluctuations.
The won led declines in Asian currencies today, falling 1 percent, on speculation policy makers will seek to limit appreciation as they assess the economic impact of an expected rise in the yuan.
Regional currency rallies may prove short-lived, as China’s central bank will limit gains while Europe’s debt crisis worsens, according to DBS Asset Management Ltd. and Daiwa SB Investments Ltd.
“If you ask me if this yuan news will make me specifically load up on Asian currencies over and above what we already own, then the answer is no,” said Desmond Soon, a portfolio manager at DBS Asset Management Ltd., which oversees the equivalent of S$7 billion ($5.1 billion) in Singapore. “The yuan is not substantially undervalued in its trade-weighted basket.”
Asian currencies have already priced in yuan appreciation and may not keep rising, said Kenichiro Ikezawa, who oversees about $3 billion at Daiwa in Tokyo.
“It is very clear that China will only let the yuan move gradually and slowly,” Ikezawa said. “So, when the yuan rises only gradually, the rest of Asian currencies won’t keep strengthening.”
After China abandoned a peg and revalued the yuan on July 21, 2005, the Taiwan dollar and South Korean won rallied to peaks by mid-August of that year and dropped 4.7 percent and 0.8 percent, respectively, in the third quarter.
Bank of Korea Governor Kim Choong Soo said a rising yuan may pose difficulties for South Korea by spurring gains in the won, which advanced the most in two weeks yesterday.
Demand from China has supported exports during the global recession. South Korea’s shipments to China surged 50 percent in the first 20 days of May, helping drive the 42 percent increase in overall exports reported for the whole month, official figures show.
“The other central banks will be more relaxed in letting their currencies move, because their competitiveness with China will change,” said Endre Pedersen, who manages about $16 billion of Asian bonds at MFC Global Investment Management. “It’s going to encourage other assets to come in Asia. People who were shaking their heads in May are now getting back in again.”