SINGAPORE, July 22: Asia embraced a new financial landscape on Friday after China finally abandoned its decade-old peg to the dollar, with regional governments and analysts widely applauding Beijing for the move.
Asian currencies were uniformly tipped to appreciate in the long-term following China’s announcement on Thursday that it had abandoned the yuan peg for a managed float against an undisclosed trade-weighted basket of currencies.
The region’s economic growth rates were also expected to get a boost, according to analysts who further predicted China’s move would inevitably be the start of a long process of the yuan regime becoming more flexible.
The most immediate impact came in Malaysia, which announced virtually straight after China Thursday that it had scrapped the ringgit’s seven-year-old peg to the dollar in favour of a managed float.
“Do not underestimate the significance of a new currency policy for China,” JPMorgan equities strategist Adrian Mowat said.
“An appreciating renminbi would accelerate the current trend of appreciating Asian currencies while boosting the region’s reflating economies.
“Strong currencies should attract capital and discourage the export of savings, adding to demand for Asian assets.”
The yuan, or renminbi, was revalued at 8.11 to the US dollar compared to 8.28, a 2.1 percent revaluation.
It will be allowed to trade 0.3 per cent either side of a daily fixed rate and trade in a managed float against a basket of trade-weighted currencies.
On its first day of trading, the yuan closed slightly easier at 8.1111 to the dollar, its low for the day and off a high of 8.1100, the Foreign Exchange Trading Center said.
Thursday’s move came after sustained pressure from the United States and other Western nations worried about China’s perceived trading advantage with an artificially weak currency unfairly boosting the nation’s exports.
Japan, the largest economy in Asia and China’s biggest trading partner, was one of the first to urge still greater yuan flexibility, while welcoming the first step.
“A shift to a basket-trading system of the Chinese yuan is positive for the Chinese and global economies,” Minister for Economic and Fiscal Policy Heizo Takenaka told a press conference.
“While the movement of the Chinese yuan is expected to be limited in the near-term after the introduction of the new trading system, it will affect corporate as well as the export activity of Japan in the mid-to-long-term.”
Japan’s Chief Cabinet Secretary, Hiroyuki Hosoda, said Tokyo “would welcome it if the yuan becomes more flexible” and Takenaka expressed similar sentiments.
Meanwhile, The Malaysian ringgit appreciated slightly in cautious trade Friday after the central bank responded to China’s yuan revaluation by scrapping the dollar peg in favour of a managed float.
The ringgit, which had been fixed at 3.80 to the dollar since 1998, settled at 3.78 by the end of the day, dealers said as the market spluttered back to life after years of inactivity.
“I think the mood is that people are a bit cautious because they are still waiting for Bank Negara’s announcement of more details,” said Maslynnawati Ahmad, economist with Avenue Securities.—AFP
