Saturday, October 1, 2022

Euro, Dollar, Yuan, Baht etc… Are Asian currencies undervalued ?

For the past several years the euro has been appreciating steadily against the US dollar. Given the Chinese yuan and other East Asian currencies are pegged to the dollar, that means the euro has been appreciating steadily against all.

The euro has now appreciated approximately 70% relative to its historic low against the dollar, set on October 26, 2000. This appreciation has been economically justified given Europe’s large trade surplus with the United States. That surplus peaked in 2005 and is now gradually coming down as the Euro appreciates, which is exactly how a market-based global economy is supposed to correct international financial imbalances.

European concerns about exchange rates are justified, but the focus should be East Asia’s currencies, not the dollar.

The key player is China, which has the largest surplus. Additionally, other East Asian countries are rationally reluctant to adjust their currencies absent a Chinese revaluation, as they fear losing competitiveness. This means China’s refusal to significantly revalue its currency against the dollar is forcing a lop-sided adjustment process that places the burden of rebalancing the US trade deficit exclusively on Europe. That is imposing a deflationary burden on Europe that could easily undermine the European economy.

In a sense, Europe now finds itself involuntarily on the same path that the US voluntarily locked itself into in the late 1990s. That path is characterized by rising trade deficits, weakened manufacturing investment spending, and loss of manufacturing jobs.

The yuan’s under-valuation stands to lower European exports and increase imports from China as spending is redirected from European produced goods to cheaper Chinese goods. The resulting increased trade deficit will directly cost jobs, and reduced demand and profitability of European manufacturing companies will reduce investment spending. Furthermore, European manufacturers will have an incentive to close plants and shift production and new investment to China, just as happened in the US.

China still have the largest part of its reserves in dollar
China still have the largest part of its reserves in dollar

The bottom line is that by all reasonable standards China’s currency is under-valued against both the dollar and the euro. China is running huge and growing trade surpluses with both Europe and the US; it has a growing global trade surplus; and on top of that it has an even larger current account surplus since its trade surplus is supplemented by massive foreign direct investment inflows.

China’s alternative ploy is to promote the yuan’s use in international trade and finance. Starting on July 6th selected firms in five Chinese cities are now allowed to use yuan to settle transactions with businesses in Hong Kong, Macau and ASEAN countries. Foreign banks will be able to buy or borrow yuan from mainland lenders to finance such trade. In June Russia and China agreed to expand the use of their currencies in bilateral trade; Brazil and China are discussing a similar idea.

The PBOC has also signed currency-swap agreements with Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea. The central bank will make yuan available to pay for imports from China if these countries are short of foreign exchange. In another recent move, Hong Kong banks are now allowed to issue yuan-denominated bonds, a step towards building an offshore yuan market.

Qu Hongbin, an economist at HSBC, predicts that by 2012 nearly $2 trillion of annual trade (over 40% of China’s total) could be settled in yuan, making it one of the top three currencies in global trade. Others reckon this is too optimistic. Although Chinese firms are keen to invoice in yuan, trading partners will be more reluctant. There is no real forward market for the yuan, making it hard to hedge risk, and it is not accepted by most other countries.

An opportunity for Thai banks ?

China has granted Bangkok Bank PCL, Thailand’s largest commercial bank, an exclusive license to clear yuan transactions in the country, media reports said Wednesday.

The move was part of China’s attempt to expand the role of its renminbi currency in Asia, Bangkok Bank senior executive vice president Prasong Uthaisangchai told The Nation newspaper.

‘Hong Kong will become the first yuan-clearing centre for China,’ Prasong said. ‘There are now several banks in Hong Kong that serve in this capacity, but in general, I think China wants to have only one bank in one market.’

Bangkok Bank, Thailand’s largest commercial bank in terms of assets, has four branches in mainland China and a network of branches throughout South-East Asia.

As the sole yuan-clearing centre in Thailand, the bank may collect yuan deposits and remit yuan abroad.

Retail and corporate customers seeking to set up yuan accounts at Bangkok Bank must be non-residents, such as Chinese companies wishing to settle their trade transaction in the Chinese currency, Prasong said.

As China’s economic power is on the rise in the world community, Bangkok Bank, Thailand’s largest commercial bank by assets, is about to tap this opportunity via the expansion of its banking business on the mainland.Over the next 10 years, BBL’s exposure in China would rise to one-fifth of its total lending, from less than 5 per cent currently.

BBL has just received approval from China’s government to establish a local bank called Bangkok Bank China (BBC), which would open a new chapter of BBL’s expansion in China. The new bank, with registered capital of 4 billion yuan (Bt20 billion), would be formally opened on January 1.

Boris Sullivan

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Thailand Business News is a comprehensive news service about Thailand with a business and financial perspective edited in Bangkok by Siam News Network


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