REVALUATION OF YUAN WILL BE GLACIAL
BORIS SCHLOSSBERG
DIRECTOR OF CURRENCY RESEARCH, GFT
CURRENCY traders now widely assume that Asia will continue to lead the world economy to a recovery in 2010. Last weekend’s Asia-Pacific Economic Cooperation (Apec) meeting only reaffirmed that fact, with members pledging to maintain their fiscal stimulus programmes. Another rally in risk currencies should result as FX markets become more confident about the sustainability of the recovery trade.
But the Apec meeting also revealed underlying tensions in the region. The export-oriented economies of Asia are increasingly concerned with China’s currency peg to the dollar. As the greenback has weakened, the free-floating Asian currencies have appreciated, making it more difficult for them to compete with Chinese products. By keeping the yuan fixed to the falling dollar, Chinese exporters have enjoyed a massive currency devaluation advantage.
I believe any revaluation effort from China will be minor at best. If the Chinese behave as they did in 2005, they will loosen the peg at a glacial pace, allowing the yuan to appreciate by no more than 3 to 5 per cent over the course of 2010. While Chinese policymakers stress the need to expand domestic demand, they continue to rely on exports to fuel growth, so any action on their part is likely to be a political gesture rather than genuine economic reform.
If the Chinese do revalue the yuan, the yen will be the biggest beneficiary in the G10, primarily because Japan competes with China while also exporting heavily to that market. Japanese manufacturers should not only see better Chinese revenues, but also find some relief on their margins, resulting in healthier growth in the Japanese economy.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail them at [email protected].