Asia Bets on Stronger Currencies

WSJだとこのような言い方になる

Investors Jockey for Position
In Stocks, Bonds on Signs
China May Ease Yuan's Peg
By PATRICK BARTA in Bangkok, Thailand, and ANDREW BROWNE and MARY KISSEL in Hong Kong
Staff Reporters of THE WALL STREET JOURNAL
November 23, 2004; Page A2

Asia appears to be in the early stages of a regionwide currency revaluation, partly in anticipation that China will let its own currency float higher sometime in the next year.

From Tokyo to Seoul to Singapore, some investors are buying up large volumes of Asian currencies, a strategy that assumes Asian countries will tolerate somewhat stronger currencies in the year ahead. The South Korean won is trading near its highest level against the dollar in seven years, while the Japanese yen is up nearly 7% since the beginning of October.
Investors also are pouring capital into Asia's equity and bond markets -- a bet that appreciating currencies will boost the value of their assets over time. Meanwhile, a number of Asia's largest companies are drafting strategies to deal with current and anticipated adjustments in Asian currencies, including cutting costs and changing the amount of business they do in dollars.

"There is beginning to be a little smoke out of that volcano that we're going to see something" in terms of stronger Asian currencies over the next year, says Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers in Washington, which long has lobbied for more-flexible currencies in Asia.

Further revaluation in Asia still is far from certain. With export growth slowing across Asia, many governments could decide further appreciation is too risky as stronger currencies could make their exports less competitive by making them more expensive on the global market. Indeed, traders said South Korean authorities intervened to buy dollars yesterday in an effort to boost the dollar and slow the appreciation of the won. (See related article.)

A modest revaluation of Asia's currencies wouldn't solve the gaping U.S current-account deficit. That deficit -- the shortfall on trade and investment income between the U.S. and the rest of the world -- has widened because the U.S. economy imports far more goods than it exports, forcing the U.S. to borrow heavily from China, Japan and elsewhere to finance its purchases. As the U.S. falls deeper into debt, economists warn, some investors might decide to pull their money from U.S. markets. That could trigger a sharp fall in U.S. asset prices and a sudden surge in interest rates, which in turn might cause a global recession.

Meanwhile, a sizable revaluation could create problems for some Asian countries by cutting the value of their huge foreign-exchange reserves, leading to hefty balance-sheet losses. This is especially true for China, which has $515 billion of foreign-exchange holdings, equivalent to about 30% of the country's gross domestic product.

Still, analysts say there are a number of reasons Asian governments may be growing more tolerant of upward currency moves.

For one thing, China has hinted it is planning to relax its currency's tight peg to the dollar as part of a strategy to give Beijing more leverage to cool its overheated economy and lessen tensions with the U.S. (See related article.) Beijing is likely to cap any currency fluctuations within a "small" range and may link the yuan to a basket of currencies, a person familiar with the government's thinking said. This person wouldn't define "small" but said 5% could count as small while 10% would be "big."

If China does act, it could give other Asian governments more flexibility to follow suit. China's neighbors are wary of letting their currencies appreciate too much without a simultaneous increase in the yuan, as doing so would make their manufactured goods less competitive.

Stronger currencies also could help Asian governments take some of the sting out of high oil and commodity prices by giving consumers and factory owners more purchasing power. Inflationary concerns are especially prevalent in South Korea, which is scrambling to avoid "stagflation" amid weak consumer demand and rising prices.

Finally, many analysts believe there is a growing recognition in Asia that the global trade imbalance is unsustainable, and that some appreciation of their currencies is necessary to prevent more-drastic -- and uncontrolled -- moves later on. The recent slide of the dollar against the euro has highlighted those risks, analysts say.

In a conference call with clients last week, Lehman Brothers' global currency strategist, Jim McCormick, said he believes the yuan will be 5% higher by the end of 2005 while some other Asian currencies could rise as much as 15%. "Asia is willing to tolerate much stronger currencies than most were thinking even a few weeks ago," he said.

In one way, Asia is experiencing a reversal of the currency crisis that swept the region in 1997. Then, Beijing helped to prevent a greater rout of Asian currencies by pledging not to devalue, turning the yuan into an anchor of regional stability. Now, the region is looking to China to pull up the anchor so that its currencies can rise in value, a sign the region has weathered the storm and is ready to sail on.

Indeed, in some ways a further decoupling of Asian currencies from the dollar could help aid the region's march to a healthier economy. To ensure their currencies move somewhat in tandem with the dollar, Asian central banks have been buying dollars and piling up foreign-exchange reserves. If they allow their currencies to rise, they will buy fewer dollars, in effect keeping more Asian savings at home, a move that could deepen capital markets in the region.

Even slightly revalued currencies would represent an important symbolic shift for Asian countries, many of which have kept their currencies at artificially low levels since at least the late 1990s. Analysts believe some Asian currencies are between 10% and 20% below the levels at which they would trade if floated freely.

Many Asian companies are proceeding as if further revaluations are inevitable. As it puts together its business plan for next year, South Korea's LG Electronics Co. says it believes the yuan will appreciate between 5% and 10% next year, but it is preparing for a rise of as much as 15% just to be safe.

Investors, meanwhile, are moving money into Asian stocks and bonds.

Many investors have been selling shares of some of the region's biggest exporters, however, a reminder that any meaningful revaluation would likely cause significant pain for many Asian companies in the short run.