Four listed companies heavily engaged in business with China are expected to benefit the most from the strengthening yuan, a DBS Securities (Thailand) analyst said yesterday.
The yuan’s under-valuation stands to lower European exports and increase imports from China as spending is redirected from European produced goods to cheaper Chinese goods. The resulting increased trade deficit will directly cost jobs, and reduced demand and profitability of European manufacturing companies will reduce investment spending. Furthermore, European manufacturers will have an incentive to close plants and shift production and new investment to China, just as happened in the US.
The real exchange rate is not the appropriate measure for a currency undervaluation, but it is the continuous, one-directional and accelerating accumulation of foreign exchange reserves. The likely improvement in the US trade balance deficit caused by an appreciating Yuan will not be offset by growing US trade balance deficits with other East Asian countries. Furthermore, giving up the actual currency peg will benefit rather than harm China, provided that the steps towards Yuan flexibility will be taken in the right sequence and order. A revaluation of the Yuan is necessary, inevitable and desirable and would not “damage Chinese development.” China needs a Yuan appreciation mainly in its own interest to assure domestic financial market stability, and to avoid an overheating of its economy and a soaring inflation.
China has moved into a managed floating exchange rate regime based on market supply and demand with reference of a basket of currencies since July 1, 2005. The spokesperson said the reform of the RMB exchange rate regime has been making steady progress since 2005, producing the anticipated results and playing a positive role. With the current round of international financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the U.S. dollar depreciated by varying margins.
Huge current account imbalances, including the US deficit and the Chinese surplus, of course reflect a number of economic factors (national saving and investment rates, the underlying competitiveness of firms and workers, etc.) other than exchange rates. Successful international adjustment of course requires corrective action by the US, particularly with respect to its budget deficit and low national saving rate, and other countries as well as by China. But it is impossible for deficit countries to reduce their imbalances unless surplus countries reduce theirs.. And restoration of equilibrium exchanges rates is an essential element of an effective global “rebalancing strategy” as agreed by the G20 over the past year.
Thailand government’s first stimulus package, may have helped limit the negative multiplier effect on household consumption.
The medium-term outlook is sobering, with growth expected at 3.5 percent in 2010 and likely remaining below potential for the next three years. Because the Thai economy is largely dependent on final demand in advanced economies, a return to pre-crisis rates of economic growth (a full recovery vs. a rebound to pre-crisis levels) will require a combination of (a recovery of demand from advanced economies and a rebalancing of the sources of growth to reduce Thailand’s dependence on demand from advanced economies. Neither process is likely to be swift. Recovery from a financial crisis is a lengthy process that involves the rebuilding of balance sheets, and the IMF estimates that half of the losses in the financial system in advanced economies are yet to be recognized.
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