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Only one way to go for yuan – up, say analysts

Rapid economic growth, soaring inflation leave China with no choice

(BEIJING) China has no choice other than to let the yuan appreciate against the dollar, analysts say.

The combination of the world’s fastest economic growth, the highest inflation rate in 11 years and the rising cost of intervention will force gains in the yuan to accelerate, even as policymakers in Beijing resist calls from the West to let the currency appreciate at a faster pace, say Pacific Investment Management Co and Pictet & Cie, Switzerland’s largest closely held private bank.

The yuan rose for a fourth straight session yesterday to close at 7.1580 versus the dollar after hitting an intraday high of 7.1534, the highest since its July 2005 revaluation. Before the market opened, the central bank fixed the yuan’s mid-point at 7.1574, up from Monday’s 7.1667.

Central bankers in Thailand, Malaysia, Singapore and the Philippines are in the same situation, making their currencies attractive, according to money managers at the two firms and Merrill Lynch & Co. Nine of the 10 best performing currencies against the dollar in 2008 will come from Asia, surveys of foreign exchange strategists by Bloomberg show.

‘You’re likely to see less intervention,’ said Ramin Toloui, who helps oversee more than US$60 billion in emergingmarket bonds and currencies at bond fund manager Pimco. ‘Several Asian central banks see more rapid exchange- rate appreciation as an important tool to fight inflation.’

After rising 7 per cent last year, the yuan has appreciated 1.9 per cent to 7.1635 per dollar so far in 2008.

JPMorgan Chase & Co, the world’s ninth-biggest currency trader, predicts a further 14 per cent increase, while Citigroup in New York forecasts a 6 per cent advance.

Thailand’s baht has climbed 3.7 per cent to 32.53 this year, while the Taiwan dollar is up 2.4 per cent at NT$31.75.

While the International Monetary Fund expects growth in Asian emerging markets to slow to 8.6 per cent in 2008 from 9.6 per cent last year, that’s still six times faster than the 1.5 per cent expansion predicted for the US.

Consumer prices in the region’s 10 largest economies outside Japan are rising at an average annual rate of 5.3 per cent, compared with 4.1 per cent in the US, data compiled by Bloomberg show. Faster inflation raises the odds that central banks in Asia will increase interest rates, bolstering the appeal of their currencies.

‘We are long Asian currencies,’ said Donald Amstad, head of Asia-Pacific fixed-income at Aberdeen Asset Management, which oversees US$205 billion. ‘Asia is in relatively better shape than the rest of the world.’

A ‘long’ position is a bet that a currency will gain.

To keep their currencies from appreciating too fast and hurting exporters, Asian central banks have bought US dollars, accumulating US$4 trillion in foreign-exchange reserves.

The downside to intervention is that it increases the supply of the local currency, which tends to fuel inflation. To prevent that from happening, Asian central banks typically sell bonds to remove those funds from the economy.

That option has become more costly because interest on the debt is paid with income from its reserves, which are invested in dollar-denominated securities.

The People’s Bank of China pays 1.31 percentage points more on its six-month bills than it earns on similar maturity US Treasuries following the US Federal Reserve’s five rate cuts since September. Six months ago, the spread was 2.2 percentage points in favour of US debt.

After four years of profits, the bank is now losing US$4 billion a month by intervening, according to French bank BNP Paribas.

 

Source: Bloomberg, Reuters (Business Times 20 Feb 08)

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