Currency wars defused by China as yuan rally spreads across Asia

CHINA is helping its Asian neighbors stay out of the global currency wars.

Policy makers in the world’s biggest exporter have resisted weakening the yuan as economic growth slows, seeing exchangerate stability as key to winning global reserve- currency status from the International Monetary Fund ( IMF) this year. That in turn has reduced pressure on China’s regional export rivals to keep their products competitive with weaker exchange rates, according to BlackRock Inc., the world’s largest money manager.

“We don’t expect a large depreciation of the yuan,” Joel Kim, the head of Asia-Pacific fixed income at BlackRock, which over- sees $ 4.8 trillion, said April 21 by e-mail. He predicts Asian currencies will outperform peers in other emerging markets. “If they would do something like that, for the rest of Asia and the rest of the world it would obviously set off another round of competitive devaluation.”

Foreign- exchange traders have started to take notice. The Bloomberg JPMorgan Asia Dollar Index has strengthened 2.3% from an almost five-year low on March 13, while the average cost of options to sell nine Asian currencies against the dollar dropped last week to the lowest since Dec. 3 versus bullish contracts. ABN Amro Bank NV, the most accurate forecaster of Asian currencies for three straight quarters, raised its June targets for the yuan, Taiwan dollar and South Korean won last week.

Taiwan and South Korea, along with Singapore, have the highest export exposure to China among Asian peers, according to Roy Teo, a Singapore- based strategist at ABN Amro. He raised his June forecast for the won by 1.8% to 1,100 per dollar, while increasing predictions for the yuan and the Taiwan dollar by 0.8% and 1.3%, respectively.

China’s currency will probably end the year little changed at 6.2 per dollar, compared with 6.1993 as of 9:10 a.m. London time on Wednesday, according to the

median of 36 analyst estimates compiled by Bloomberg.

The yuan depreciated in the first two months of 2015 as traders speculated the People’s Bank of China ( PBOC) would follow peers from Europe to Australia in using weaker exchange rates to support growth. The rebound began on March 3 after PBOC Deputy Governor Yi Gang said the currency “will remain very stable in the future.”

FED RISK

The yuan has rallied 1.2% from its March low, while Singapore’s currency has climbed about 5% from its low that month and Taiwan’s dollar has gained about 3%. The won is up 6% from its almost two-year low reached on March 16.

There’s still scope for the yuan and its peers to weaken against the dollar when the US Federal Reserve raises interest rates later this year, according to ABN’s Teo. He kept his end-2015 estimates unchanged at 6.35 for the yuan and NT$32.10 for Taiwan’s dollar — 5% weaker than Wednesday’s level.

The yuan has been a source of stability in Asia during past crises when the dollar surged. It appreciated 7% during the global financial crisis in 2008 and rose 0.2% over 1997 and 1998, when South Korea, Thailand, Indonesia and the Philippines were forced to devalue and seek IMF bailouts.

Exports to China account for about 23% of Taiwan’s economy, 16% of Singapore’s and 11% of South Korea’s, according to ABN Amro.

“A stable yuan helps everybody,” Dennis Lim, a Singapore-based director of emergingmarkets research at Franklin Templeton Investments, which oversees $881 billion, said April 28. “There would be so much certainty for manufacturers as they can plan ahead. That’s going to help the Koreans and Taiwanese.” —