Asia Embraces New Financial Landscape After China's Currency Move

July 22, 2005
Asia embraced a new financial landscape on June 22 after China finally abandoned its decade-old peg to the dollar, with regional governments and analysts widely applauding Beijing for the move.  Asian currencies were uniformly tipped to appreciate in the ...

Asia embraced a new financial landscape on June 22 after China finally abandoned its decade-old peg to the dollar, with regional governments and analysts widely applauding Beijing for the move. Asian currencies were uniformly tipped to appreciate in the long-term following China's announcement on July 21 that it had abandoned the yuan peg for a managed float against an undisclosed trade-weighted basket of currencies. The region's economic growth rates were also expected to get a boost, according to analysts who further predicted China's move would inevitably be the start of a long process of the yuan regime becoming more flexible.

The most immediate impact came in Malaysia, which announced virtually straight after China Thursday that it had scrapped the ringgit's seven-year-old peg to the dollar in favor of a managed float.In Malaysia, the business community said the yuan-triggered revaluation of the ringgit was an important step in making the Southeast Asian nation a more attractive destination for investors while helping the local economic liberalisation process.

Japan, the largest economy in Asia and China's biggest trading partner, was one of the first to urge still greater yuan flexibility, while welcoming the first step. "While the movement of the Chinese yuan is expected to be limited in the near-term after the introduction of the new trading system, it will affect corporate as well as the export activity of Japan in the mid- to long-term." Japan's Chief Cabinet Secretary, Hiroyuki Hosoda, said Tokyo "would welcome it if the yuan becomes more flexible".

Other governments around the region welcomed China's revaluation, although they also emphasised that the 2.1% appreciation in itself would not have a major initial impact. "I think it's a positive development because greater flexibility allows the adjustments across economies to be made through a more flexible pricing structure," the managing director of Singapore's central bank, Heng Swee Keat, said. "In the long-term within Asia, it gives us a better buffer to absorb any sort of external shocks so those are positive developments for Asian economies and the world economy."

Australian Trade Minister and acting Prime Minister Mark Vaile said China's decision was "good for Australia's exports and international markets. "China is Australia's second largest export market and the revaluation of the renminbi will make Australian exports cheaper, having a positive impact especially on resources and agriculture products," Vaile said.

Copyright Agence France-Presse, 2005

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