Yuan Sets Tone for Asia as Japan Dethroned by China: Currencies

Photographer: Jerome Favre/Bloomberg

The outperformance of currencies in developing relative to the yen signals China’s dominance in shaping the region’s economy as Japan’s influence wanes. Close

The outperformance of currencies in developing relative to the yen signals China’s... Read More

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Photographer: Jerome Favre/Bloomberg

The outperformance of currencies in developing relative to the yen signals China’s dominance in shaping the region’s economy as Japan’s influence wanes.

Asian central banks are tolerating gains in their currencies against the yen as China’s economic recovery diminishes concern that stronger exchange rates may damp their export advantages.

South Korea’s won has climbed a record 20 percent against the yen this year while Taiwan’s dollar rose 17 percent and the yuan gained 13 percent. Asian currencies moved more in sync with the yuan than the yen over the past year, correlation data show.

The outperformance of currencies in developing Asia relative to the yen signals China’s dominance in shaping the region’s economy as Japan’s influence wanes. China, the largest trading partner of South Korea and Taiwan, is rebounding from a slowdown over the past seven quarters, while Japan’s growth is forecast to decelerate next year, according to the median estimate of about 50 economists surveyed by Bloomberg.

“Central banks are not standing in the way of their currency appreciation,” Edwin Gutierrez, who helps oversee $11 billion in emerging-market debt at Aberdeen Asset Management Plc, said in a phone interview from London yesterday. “The yuan is becoming more influential for those currencies. Japan’s role is diminished because of the rise of China.”

South Korea’s new government won’t see the need for intervention because the exchange rate is more influenced by external economic trends rather than domestic ones, said Kim Jong In, an adviser to President-elect Park Geun Hye, by telephone on Dec. 20.

Taiwan Mandate

Taiwan’s central bank Governor Perng Fai-Nan said on Dec. 19 that the monetary authority’s mandate is to keep relative exchange-rate stability and to intervene in the event of abnormal moves. He made similar comments in September when the Taiwan dollar was 12 percent cheaper versus the yen.

Thailand’s policy makers seek to let the baht move in line with the market as foreign inflows increase, Bank of Thailand Deputy Governor Pongpen Ruengvirayudh said on Dec. 15. At 11 percent, foreign ownership in Thailand’s bond market is still low, compared with as much as 40 percent of its peers, he said.

The Bloomberg JP Morgan Asia Dollar Index has risen 2.5 percent this year after reaching 118.14 on Nov. 29, the highest level since September 2011, as the region’s economic growth attracts foreign capital. The yuan advanced to a 19-year high of 6.2223 per dollar in November and trades at the strongest level since May 2010 against the yen.

Stronger Won

The won touched 12.37541 per yen today, the strongest level since May 2010, while Taiwan’s dollar reached a 31-month high versus Japan’s currency. South Korea and Taiwan compete with Japan in electronics and information technology.

Asian economies outside Japan are recovering from the slowest expansion in three years. China’s manufacturing grew in November for the first time in 13 months, an index compiled by HSBC Holdings Plc and Markit Economics showed. Taiwan’s industrial output climbed to the highest in nine months in November. South Korea’s industrial production increased 2.9 percent in November from a year earlier, the fastest growth since May, while the current account surplus reached a record $6.9 billion, Statistics Korea said today.

Japan’s economy is moving in the opposite direction as exports dwindle. Growth will slow to 0.65 percent next year from 1.7 percent in 2012, according to the median forecast of 50 economists surveyed by Bloomberg. That compares with the average expansion of 6.7 percent in the region in 2013 and 8.1 percent in China, surveys show.

Abe’s Pledge

The yen weakened past 85 per dollar on Dec. 26 for the first time since September 2010 as incoming Japanese Prime Minister Shinzo Abe said he would push for “bold monetary easing.” Japan’s cumulative trade deficit for the first 11 months of 2012 amounted to 6.28 trillion yen ($73 billion), more than double the record shortfall in 1980.

China, which surpassed Japan as the world’s second-largest economy in 2010, accounted for 25 percent of South Korea’s exports this year and absorbed 27 percent of the shipments from Taiwan, according to the countries’ customs data. Japan took in less than 10 percent of the exports from South Korea and Taiwan.

The correlation between the Taiwan dollar and the yuan over the past year reached 0.36, compared with 0.13 between the peso and the yen, according to data compiled by Bloomberg. A higher number indicates that one trades more closely to the other, with a reading of 1 indicating two move in lockstep.

Yuan Outlook

“As China’s economy rebounds, the yuan should appreciate faster next year than in 2012,” said Vincent Wu, a Taipei-based head of fixed-income at Fuh-Hwa Securities Investment Trust Co., which oversees NT$150 billion ($5.2 billion) of assets, said in an interview yesterday. “The yuan’s strength makes them more comfortable in letting their own currencies appreciate.”

South Korea and Philippines will step up efforts to restrain the currency appreciation as they try to protect their exports, according to Brown Brothers Harriman & Co.

The Philippines imposed limits on currency forward positions at banks on Dec. 26 after the peso advanced 6.5 percent in the past year to 41.125 per dollar. The cap for non- deliverable currency forwards at local banks is 20 percent of capital, and 100 percent for foreign lenders. South Korea adopted a similar measure a month earlier.

“We still think that the outperformance of both peso and won over other regional currencies has reached an end for the time being,” currency strategists led by Marc Chandler at Brown Brothers wrote in a note to clients on Dec. 26, citing currency intervention risk.

Asian currencies will keep rallying against the yen over the next two years, according to the median forecast of analysts surveyed by Bloomberg. The yuan may rise 6.4 percent against the yen by 2014, according to the median estimate of analysts in a Bloomberg survey.

China View

China has reduced currency intervention as policy makers increased the daily limit that the yuan is allowed to rise or fall in April to 1 percent from 0.5 percent. China will increase the movement of the yuan “appropriately” to handle the latest rounds of policy easing by the world’s central banks, the official Xinhua News Agency said in an editorial on Dec. 21.

“Even though we think that the yen weakness is going to continue, we don’t think that investors should worry about that when it comes to allocations to Asia currencies,” said Monty Gandhi and Dirk Willer, currency strategists at Citigroup Inc. in New York, wrote in a note on Nov. 28. “Non-Japan Asia’s manufacturing is more similar to that of China than to Japan. Hence policy makers in Asia are more wary of relative strength of their currencies versus China than Japan.”

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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