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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (34001)	7/22/2005 1:29:08 PM
From: RealMuLan	Read Replies (2) \| Respond to of 116555

ANALYSIS-China revaluation may spur, not deter, speculation Friday 22 July 2005, 3:49am EST By Scott Hillis BEIJING, July 22 (Reuters) - China's small revaluation of its currency may have whetted rather than satisfied the appetite of speculators, and could end up attracting more short-term funds on expectations that there are further changes to come. For two years, China has grappled with the effects of large inflows of foreign cash into the country in anticipation of the government allowing the yuan to rise in value. That complicated monetary policy because the central bank had to buy back, or sterilise, much of the new yuan it issued to purchase incoming foreign currency and defend the peg. Thursday's move to drop the yuan's dollar peg for a currency basket and revalue the yuan by 2.1 percent was smaller than many had expected, prompting market chatter of more moves to come. And that means it could encourage more so-called "hot money". "We think that the pressure on China to make a further move will resume, possibly after the initial short interval of expected confusion," Yianos Kontopoulos, global forex strategist with Merrill Lynch, said in a research note. "With or without additional capital controls, the inflow of capital into China will soon be re-energised." Non-deliverable forwards, derivatives used by foreign investors to bet on the yuan's future value, showed expectations of a yuan rise of over 6 percent in a year to 7.64 per dollar. SPECULATORS SQUEEZED? The official China Daily warned in an editorial that the move could end up encouraging speculation, but signalled that no large rises in the exchange rate would be in the offing. To prevent a surge in speculative inflows, analysts said it would be crucial for the central bank to re-establish credibility by holding the yuan at its new level. The central bank did take pre-emptive action when, minutes before the revaluation, it raised interest rates on U.S. and Hong Kong dollar deposits by 0.5 percent to encourage people to park those currencies in banks instead of swapping them for yuan. Arthur Kroeber, editor of the China Economic Quarterly, took a contrarian view that inflows would not necessarily rise because of measures such as China's clampdown on the booming property market, a favoured place for speculators to put their money while awaiting a destination. "If you were a speculator, the last couple of years was a pretty easy play. But all the reasons to speculate from have gradually been getting squeezed," Kroeber said. BATTLE OF EXPORTERS On trade, the appreciation made Chinese exports 2 percent more expensive overnight. That is probably not enough to have a large impact on China's export juggernaut, which exported $342 billion worth of goods in the first half of 2005, nearly 33 percent more than a year earlier. "If the U.S. economy remains on a reasonable growth path, we are still loking at strong export growth," said Tai Hui, an economist with Standard Chartered Bank in Hong Kong. But because many Chinese exporters struggle to survive with razor-thin margins, even a tiny rise in the prices of their goods may be enough to prompt an industry shake-out. "In general there has to be a readjustment and squeezing out of overcapacity. So a modest move like this could help determine who is actually competitive," Kroeber said. Export sector profits could plummet by 10 to 20 percent, said Andy Xie, chief China economist for Morgan Stanley in Hong Kong. "For China's currency to become a strong currency, the export sector has to transform into a proprietary sector that possesses its own distribution channels and branding," Xie said. But with its fate tied to an undisclosed currency basket, the yuan could actually end up depreciating against the dollar if that currency continues to strengthen against the euro. If that happens, Chinese exports would become cheaper in dollar terms, a result not likely to make Washington happy. "If I were sitting in the People's Bank of China right now, there might be a smirk of satisfaction on my face," Kroeber said. "But that might be reading too much into it." today.reuters.com