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Strategies & Market Trends : China Warehouse- More Than Crockery -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (4951)	5/25/2005 3:55:47 PM
From: RealMuLan	Read Replies (1) \| Respond to of 6370

Has HKD Paved The Way For RMB Revaluation? May 24 2005 - Australasian Investment Review – (AIR) Last week’s decision by the Hong Kong Monetary Authority to adopt a two-way convertibility band for the Hong Kong dollar (HKD) caught the market by surprise, forcing traders to cover their short positions. The FX team at Singapore-based DBS suggests the move may have much broader implications than just sparking a short-covering rally, with the experts suggesting it could be a precursor to a similar move by Chinese authorities, with a possible ultimate scenario being the unification of the Hong Kong and Chinese currencies. While this one currency scenario is clearly some time away from possible fruition, DBS suggests the introduction of the trading band for the HKD is a significant change in policy. DBS suggests the introduction of the trading band, making one USD worth between 7.75-7.85 HKD, is also a necessary policy change as Hong Kong has been dealing with a fundamental issue in its economy - that of being hugely integrated with another economy (China) with a significantly undervalued currency, the renminbi or yuan. This undervaluation of the Chinese currency has meant Hong Kong has received huge inflows of speculative money in recent years, which has increased liquidity in its economy and had the effect of pushing up both real estate prices and the Hong Kong stockmarket. These two asset classes combined have experienced a 60% increase in capitalisation over the past two years. As DBS notes the introduction of a valuation band is a step, albeit minor, in cleaning out this speculative money and provides Hong Kong with some additional time as it waits for China to act on revaluing the yuan. In DBS’s view, the introduction of a trading band offers the Chinese monetary authorities the opportunity to make a similar move with the Chinese currency. DBS offers June 23 as a possible date for such a change, as this day corresponds to when the new upper band for the HKD comes into effect. DBS suggests such a move would then allow the Chinese to phase in a gradual appreciation of their currency, the beginning of which could coincide with the introduction of a broader trading band next month. This would be followed by a longer adjustment period as the two currencies were brought in line, with DBS suggesting two to three years may be required to officially guide the HKD to a trading band around the yuan. As DBS notes it would be an inefficient system to maintain two separate exchange rate pegs, so eventually the systems could be merged and a unified currency adopted. By first pegging the band around the USD, the integration would also have a safeguard in that if some negative factors emerged to impact on China’s economy and caused its growth to stall, Hong Kong could return to its original peg against the USD and so not be dragged down by any such problems that were not related to its own economy. DBS notes many things are required for this scenario to play out, not least being China’s ability to develop a fully operating monetary policy and a fully open capital account, as well as numerous other economic and political considerations on both sides. These factors support its view such a scenario could take several years to come to fruition. In DBS’s view, despite this being a long-term possibility, the market is likely to begin pricing such a scenario into its expectations for the HKD, as evidenced by the short-covering in the HKD when it announced its new trading band. This covering was accompanied by a collapse in volatility in the yuan spot market, with DBS anticipating further reactions if and when China announces a similar policy change, which the experts suggest may in fact be soon. Copyright Australasian Investment Review. AIR publishes a weekly magazine. Subscriptions are free at www.aireview.com aireview.com