China Yuan's Rise to Have Small Impact on Asian Economies

Manila Bulletin, May 18, 2006 | Go to article overview

China Yuan's Rise to Have Small Impact on Asian Economies


Byline: JUN CONCEPCION

HONG KONG, May 17 (XFN-Asia) -- China's yuan is likely to rise further against the US dollar, after breaching a key level Monday, but that is not expected to have a major impact on economies around the region, analysts said.

They said that the yuan could reach parity with the Hong Kong dollar this year, resulting in some additional inflation in the territory, but the effect will be modest.

"Judging from the current trend of the yuan's appreciation against the US dollar, I foresee the yuan touching 7.8 to the dollar by the end of the year, " said Brian Cheung, general manager of Liu Chong Hing Bank.

The yuan briefly strengthened past 8.00 to the US dollar on Monday before falling back yesterday. The Hong Kong dollar is pegged at 7.8 to the US unit.

Estimates of the extent of the yuan's advance over the course of this year vary widely -- with some seeing as much as a 10 percent gain by the year-end.

But most analysts said they expect a much smaller rise, and that should limit the impact on Hong Kong and other economies in the region.

"On an annualized basis, I expect Beijing to allow its currency to appreciate by about 3.0 percent against the US dollar," said Jun Ma, chief economist for Greater China and head of China and Hong Kong macro strategy at Deutsche Bank.

"But this appreciation will likely happen gradually, which means it is unlikely to have any significant adverse impact on Hong Kong and the rest of the Asia-Pacific," he said.

China has been under pressure from its major trading partners, particularly the US, to let the yuan appreciate.

The US had a trade deficit of $ 202 billion with China last year, and many critics of Beijing's policies say that the yuan is undervalued, giving China an unfair trade advantage.

In a report last week, the US Treasury stopped short of calling China a "currency manipulator" but it expressed its disappointment with Beijing in the slow pace of the yuan's rise.

Analysts said a stronger yuan might add to inflation in China, and that might in turn be "exported" to different economies, including Hong Kong.

China-made goods account for about 30 percent of the items, including food and clothing, in Hong Kong's consumer price index.

An appreciation of the yuan and a consequent increase in the cost of Chinese goods and services could translate into an additional inflation rise of about 1.0 percentage point in Hong Kong, said Ma of Deutsche Bank.

He said an appreciation of the yuan against the US dollar will not necessarily make the cost of importing Chinese products more expensive for all of the territory's Asia-Pacific neighbors, however.

"Unlike Hong Kong, which depends to a significant extent on China for fresh food and other basic necessities, the volume of goods that Asia-Pacific countries import from China varies ... and is far from substantial on the average," Ma said.

Instead of "importing" inflation from China, certain Asian countries, notably Japan and South Korea, might even see deflationary pressures from China in the event that the yen and the won continue to appreciate against the dollar, he said. …

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