Around Asia's Markets: Yuan lift could be spreading regionally
Bloomberg News
April 20, 2005
Darren Boey

Tim Rocks, an Asian equities strategist at Macquarie Securities, is telling his clients to hang on to their stocks in the region on optimism that an appreciation of the Chinese yuan will attract more overseas investment.
 
China's easing of its decade-old currency peg against the dollar would spark speculative buying of regional currencies, drawing investors seeking greater returns to Asian stocks, Hong Kong-based Rocks said.
 
"It will be a signal that other currencies should start rising as well," he said recently. "When it happens, this market will spike. A wall of money will hit the region."
 
Pressure to make the yuan more flexible has come from the United States and other members of the Group of 7 industrial nations, who say the peg to the dollar gives Chinese manufacturers a price advantage that has helped drive the U.S. trade deficit to a record level and threatened economic growth in Europe. The currency is fixed at 8.3 yuan per dollar.
 
The Chinese government has said it needed to bolster the banking system, burdened with $438 billion of bad loans, before letting the yuan trade more freely. Prime Minister Wen Jiabao said on March 14 that the country was laying the groundwork for a freer currency system and changes may come "unexpectedly."
 
The markets that could benefit most from a yuan appreciation are Malaysia, South Korea and Taiwan, Rocks said. Foreign investors will target the countries' largest stocks, he said.
 
Malayan Banking, Samsung Electronics in South Korea and Taiwan Semiconductor Manufacturing are the biggest constituents of the countries' key indexes.
 
Speculation for a relaxing of Malaysia's own currency peg may return if the yuan is revalued, Rocks said.
 
The country's former prime minister, Mahathir Mohamad, fixed the ringgit at 3.8 to the dollar in 1998 to curb currency speculation during the Asian financial crisis. Mahathir said in January that it was time to review the policy.
 
"Malaysia will be a big beneficiary of foreign inflows if they haven't revalued before China," Rocks said.
 
History supports Rocks' argument. Stocks tied to China and Malaysia rose in last year's second half amid speculation that the central banks would allow their currencies to appreciate, increasing returns on yuan- and ringgit-denominated assets.
 
The Hang Seng China Enterprises Index, consisting of 38 mainland companies listed in Hong Kong, and the Kuala Lumpur Composite gained 11 percent. The Hang Seng rose 16 percent.
 
That speculation has eased this year amid a series of commitments from Chinese and Malaysian government officials to their countries' pegs.
 
Izzuddin Dali, secretary general of Malaysia's treasury, said last month that his government would maintain the peg for now.
 
Wen, of China, said March 14 that his government has yet to agree on how to adjust the peg. These comments have prompted thinking among some investors that there is less to be made from speculating on currency appreciation.
 
"We have already seen the wall of money," said Lilian Pang, a fund manager at Deutsche Asset Management in Singapore. "The renminbi appreciation has been widely anticipated for a long time. I won't be buying Asia based on this expectation."
 
Stronger currencies in South Korea and Taiwan may also reduce the value of the countries' exports, denting expansion in the two economies. The won and the Taiwan dollar will strengthen the most in Asia on a stronger yuan, according to Bank of America and Royal Bank of Scotland Group.

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