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Neighbors to Feel Effects of China's Currency Shift

The decision may roil other Asian nations' economies but could be a boon in the long run.

July 26, 2005|Don Lee | Times Staff Writer

SEOUL — China's revaluation of its currency last week may roil the economies of its Asian neighbors in the short term but could be a boon for the region in the long run.

Analysts say China's move toward a market-based currency system may stimulate trade and consumer demand in the region and lead to increased productivity for manufacturers.

Although a stronger Chinese currency could help some Southeast Asian countries that compete directly with China on exports, economists say more advanced economies may suffer.

Japan, South Korea and Taiwan, with three of Asia's richest economies, have staked billions of dollars in setting up export manufacturing bases in China, much more than countries in the West.

But Beijing's 2% increase in the value of the yuan against the U.S. dollar on Thursday, with the prospect of further increases, means higher costs for companies producing goods in China. Many foreign-invested manufacturers in China pay their labor and other bills in yuan but receive payment from customers in dollars, so a rise in the Chinese currency hurts their bottom lines.

"Truth is, a 2% appreciation has little real impact on America but will inevitably harm us exporters," said Chen Qiu, chairman of the Taiwan Furniture Manufacturers Assn.

For years, the United States has pushed Beijing to revalue its currency, saying the Chinese had an unfair advantage over American manufacturers because the yuan was grossly undervalued.

If the yuan keeps rising, Chinese-made goods will be more expensive in overseas markets. That may help some Asian companies as well as Western exporters struggling to compete against China's low-cost goods. But it would have limited effect on the United States and large Asian economies that tend to produce higher-end merchandise.

A higher yuan could reduce overall demand for Chinese-made products and slow China's booming economy. That could send further ripples particularly through the Pacific region, which has become increasingly dependent on China.

"China's currency system change has raised the volatility" for East Asian economies, said Deok Ryong Yoon, an economist at the Korea Institute for International Economic Policy in Seoul. "The business and economic environment has become more difficult for us."

China is South Korea's top trading partner, accounting for about one-third of South Korea's exports. Even before the yuan appreciated last week, Chinese imports had begun to slip as Beijing's efforts to keep China's economy from expanding too fast led to reduced factory orders for machinery and equipment from neighboring countries.

This "China shock," as some economists called it, already has clipped growth in South Korea and has cast a pall in Taiwan and Japan as well.

China's growth had been lifting Japan's long-sluggish economy. After Beijing's decision to scrap the yuan's decade-old peg to the dollar in favor of an unspecified basket of foreign currencies, Japan's central bank praised the move. But investors in Japan didn't celebrate. Tokyo's stock market fell Friday, although it rebounded Monday.

Chi Hung Kwan, a senior fellow at Nomura Institute of Capital Markets Research in Tokyo, said the market reaction was understandable.

On the one hand, a rising yuan will help Japan by strengthening the purchasing power of Chinese consumers, boosting domestic demand for Japanese goods.

Japanese giants such as Honda, Nissan and Toyota have established manufacturing facilities in China largely to cater to the domestic auto market, which has huge potential for growth. Japanese carmakers and other firms import many components from Japan that are used for production in China, before the final products are shipped back to Japan or elsewhere for consumption. As a result, a higher yuan, relative to the Japanese yen, would make those parts cheaper.

At the same time, Kwan noted, more Japanese companies use China as an offshore production base rather than a consumption market. They include firms such as Sony and Uniqlo, a leading retailer of Japanese casual clothes, with more than 600 stores in Japan and a handful in China.

"On the whole, I think the impact is more negative rather than positive" for Japan, Kwan said of China's revaluation.

That could change as China's economy continues to expand and domestic consumption becomes a greater part of the country's growth.

Andy Xie, an economist at Morgan Stanley & Co. in Hong Kong, doesn't see that happening anytime soon. The Chinese savings rate is very high, and the 2% appreciation in the yuan is too small to have much effect, Xie said.

He said Beijing's new currency adjustment suggested that Chinese policymakers would maintain tight control of the yuan's value, making it probable that the currency would behave as it had before, fixed in a very narrow band to the dollar. Only a political change will lead to a truly free-floating currency policy, he said.

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