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Seoul Braces for Yuan Revaluation

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1 Seoul Braces for Yuan Revaluation on Mon Mar 08, 2010 12:23 pm

littlekracker


03-08-2010 19:07
Seoul Braces for Yuan Revaluation

By Cho Jin-seo
Staff Reporter

Financial market players in Korea said they are bracing for the expected appreciation of the Chinese currency against the U.S. dollar, though they think it will not happen in the immediate future as hinted by the governor of the country’s central bank Sunday.

Zhou Xiaochuan, the governor of the People’s Bank of China, hinted at the appreciation of the yuan on Sunday. It’s the first time a senior Chinese official has talked about the yuan’s appreciation since the global financial crisis. But analysts, researchers and traders in the Korean market are not taking his remark too seriously.

“No matter what its government officials have said, traders in Korea have long been accumulating the Chinese yuan,” said a foreign exchange trader at a major Seoul bank Monday, on the condition of anonymity.

“Our belief was that the Chinese government cannot help but appreciate its currency someday because of inflationary pressure.”

Analysts also suspected that the Chinese central bank governor was making a general comment on its long-term policy.

“I don’t think a change will be made as early as some market participants think,” said Zheng Xiangbin, an analyst from China at Daewoo Securities. “It is true that growth in China’s exports is putting some pressure for the yuan’s appreciation. But looking at what the governor says, I think there still is uncertainty.”

On Sunday, China’s central bank governor said that the dollar-yuan peg is “a part of our package of policies for dealing with the global financial crisis,” and “sooner or later, we will exit them.” Many Western media ran it as their cover story. The Financial Times had it on its front page under the title of “Beijing looks at severing dollar peg.”

Korean analysts were more skeptical. Some viewed this as a diplomatic gift from Chinese politicians to their American counterparts.

“I think there was some showmanship involved in this incident,” said Lee Chi-hun, a researcher at the Korea Center for International Finance. “Some high-ranking American officials visited China a few weeks ago. And then the Chinese central bank held a press conference, which was unusual for them and was not really necessary. I think it was a diplomatic gesture from China to America,” he said, adding that the appreciation is likely to take place after March.

The strengthening of the Chinese currency is likely to have an upward pressure on the value of the Korean won, analysts said.

“Historically, a 10-percent appreciation of the yuan against the dollar pushes up the won by 4 to 5 percent,” Lee said.

Such a correlation is because of the competition between Chinese and South Korean goods on the global market. Both economies are heavily reliant on exports of manufactured goods, such as cars and electronics.

Appreciation of the Chinese yuan makes Korean companies more price-competitive globally, and this tends to encourage consumers to buy more Korean goods with their currencies, making the won more expensive to buy.

It is, however, difficult to say whether the appreciation of the yuan can only be a boon to the South Korean economy.

The export industry will benefit, but the price hike of Chinese goods will hurt the import industry and ordinary consumers at the same time. China is the largest trading partner of South Korea, accounting for 24 percent of exports and 17 percent of imports.

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