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Friday, July 22, 2005

Unpegging the Ringgit

Source: China Revaluation A lot has happen in the past 24 hours - China revaluates the yuan and announcing plans to move into a basket of currencies, bombings again in London, largest fall in US jobless claims and Malaysia follows suit with China by unpegging the Ringgit! Wow! So what does this mean to us plain folks? While others are worried about their reduced Adsense earnings, the Bank Negara stepping in to prevent a rapid appreciation, this is what I gather after reading the reports. Of course, there's no right or wrong to this, since we can't see the future: 1. Oil prices will go down - Why? China is one of the largest importer of oil, so naturally when the yuan strengthens, China exports get more expensive and ppl think this will slow down the economy. This should happen in the medium term as things will go back to its previous state considering China's rapid economy growth. However, there's a countering argument since oil is priced in US dollars, crude oil will be realtively cheaper for Chinese importers. Thus, they'll buy more now and drive oil prices up. 2. +1 to China diplomatic relations - By revaluing the yuan, this gives a clear signal that China's a cooperative trade partner and shows a growing maturity of the Chinese economy. 3. Malaysia made the right choice in unpegging the Ringgit - With total exports of about $123.5 billion and $26.25 billion in that to China (~21%) makes our economy quite reliant on China. If we have stayed on the 1USD = RM3.8 peg, we would have make huge losses in trade, while unpegging it and making sure that it stays within a certain trading band comparable to China makes perfect sense to me. 4. Expect Chinese corporations to venture out of China now - with reports of China trying to gain favour to get approval for deals such as Unocal (an American oil company), this might eventually be true. As I speak/write, the USD is rising against the major currencies - GBP, EUR, JPY.

Most analyst expects China's trading bands to widen soon. I personally do not think so, since everyone's been speculating the yuan revaluation since 2002, and it has only happened now. Although there are signs of Chinese economy overheating, I believe the Chinese goverment would like to sit-and-observe the situation of the current revaluation first before anything else happens.


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