By Kim Jae-kyoung
Staff Reporter


A time bomb is ticking: the yuan revaluation. The Chinese currency appreciation is looming larger than ever before, overshadowing Korea’s exports frontier.



Now, it’s only a matter of time and it may be sooner than later. The currency adjustment comes more as a threat to South Korea than as an opportunity.

According to analysts, it is urgent for Korea to take all the preparatory steps necessary to make sure that a yuan revaluation does not undermine Korea’s growth potential.

The revaluation is feared to spell more harm to the economy than good, even though it has some positives, they said.

The debate on the possibility of China revaluing the currency has lasted for the past two years, intensifying this year, as the U.S. and Japan, saddled with huge trade deficits with China, stepped up pressures for a yuan revaluation.

Analysts said that a yuan revaluation will slow the world’s third largest economy, affecting Korea’s exports to China, the second largest export market for Korea.

``Possible effects of a revaluation of the Chinese currency on the Korean economy and financial market are negative,’’ said Andy Xie in an interview with The Korea Times.

``The market will use the opportunity to push the won up even more, so Korea will not gain on China in the exchange rate,’’ he added. ``The revaluation could cause China’s economic cycle to turn down, which would deprive a main source of revenue for Korean companies.’’

Samsung Economic Research Institute said that if a yuan revaluation results in further appreciation of the won against the U.S. dollar, it will hurt productivity of export companies.

``A possible slowdown of the Chinese economy, led by the revaluation, will deal a blow to the Korean economy,’’ it said.

In particular, industries such as electronics, electricity and petrochemicals, will likely suffer more difficulties as most of the industries export products indirectly via China routes, it added.

According to China’s National Bureau of Statistics, a 15 percent appreciation of the yuan would turn China’s export growth negative this year, and a revaluation of 3 to 5 percent would lead to export growth to less than 10 percent, compared with last year’s growth of 35.4 percent.

The latest research from the Chinese Academy of Social Science estimated that a 10 percent appreciation would lead to the loss of 2.7 million jobs this year and another three million in 2006.

However, some policymakers and analysts have dismissed such concerns, saying that such aftereffects will depend heavily on when or how much China will revalue its currency.

They stressed that if Korea prepares well for a yuan revaluation, the nation can use this as a chance to take the lead in overseas markets where Korean firms compete with Chinese counterparts.

``A yuan revaluation may increase the price of Chinese products in the global market, giving more opportunities to Korean firms,’’ Korea Center for International Finance (KCIF) president Jin Byung-hwa told The Korea Times.

``Also, China’s adjustment of the system is likely to boost the nation’s exports to China because the change will make the export price of local goods to China cheaper,’’ he added.

At a meeting with reporters yesterday, Finance-Economy Minister Han Duck-soo said that since economic structures of the two nations are quite different from each other, a yuan revaluation would not have a great impact on the South Korean economy.

Bank of Korea Governor Park Seung also said at a media briefing, ``I have no idea about the timing and scale of the revaluation, but I believe that such a change will not affect the Korean economy and financial markets because the move’s positive and negative sides will work against each other equally.’’

Choi Joong-kyung, director general of the international finance bureau at the Ministry of Finance and Economy, said that possible effects will be limited as the revaluation is not likely to affect the won’s movement against the dollar.

``Given the won has gained the largest value against the greenback, except for the euro, over the past year, the local unit has already reflected future change,’’ he said. But he forecasts no yuan revaluation in the foreseeable future.

Yuan Revaluation _ Now or Later?

Expectations of a yuan revaluation hit a peak before the May Day holiday two weeks ago as market participants speculated that China’s central bank would revalue its currency, but nothing happened over the week-long holiday.

Again, analysts and investors are jumping at a wild guessing game to predict the timing of China’s revaluation. Most believe that a revaluation is inevitable, but not immediate. In short, its timing is still in the air.

Xie of Morgan Stanley said that China will keep the currency peg for the foreseeable future and focus on financial reforms to create the conditions for a flexible exchange rate.

He pointed out that China is not yet ready to change its currency system because it has yet to meet two necessary conditions for a yuan revaluation. He expects China to maintain the peg system for another two years.

``First, China’s state banks should be listed. Listing the banking sector would lead to a good assessment of the bad asset problem in China. If the magnitude of the problem is bigger than expected, China may have to delay its currency reform,’’ he said.

``Second, any currency reform by China should be acceptable by the U.S. Were the US to disapprove of China’s actions, it would continue to put pressure on China,’’ he added.

The latest announcement by the People’s Bank of China (PBC) supported this expectation. On Wednesday, the bank said that it has no plans to adjust its currency system anytime soon after media reports added to intense speculation of an immediate revaluation of the yuan.

Nonetheless, many analysts don’t rule out possibility about an immediate move by China to change its exchange system that has pegged the yuan to the dollar around 8.28 since June 1995.

``Since it takes at least a few days to administer the introduction of a flexible exchange system, the chances are that China will implement a currency reform over a long holiday, such as Thanksgiving this fall,’’ Jin of KCIF said.

``However, given China is technically ready to revalue its currency and the Chinese government is unpredictable, an immediate currency reform still remains possible,’’ he added.

In an interview with a foreign media on Wednesday, PBC Deputy Governor Wu Xiaoling said that China has made technical preparations for currency reform and would have done so sooner had Washington pushed it to do so.

It is widely believed that the yuan is already under domestic and foreign pressure to appreciate. This view could be supported by the massive inflow of foreign direct investment (FDI), a large current account surplus and the huge accumulation of foreign exchange reserves in recent years.

Although nobody but the Chinese government knows the exact timetable and scale of a yuan revaluation, many analysts expect that China will revalue its currency by a small margin within the third quarter.

Kookmin Bank Asset Management economist Park Jae-hwa said that a yuan revaluation is likely between July and September, but China is not likely to appreciate its currency by more than 15 percent.

Citigroup senior economist Oh Suk-tae also said that he is not so sure that a revaluation would actually happen within the very near future, but expects the change to eventually happen in the second quarter.

In this regard, it is suggested that Korea should be more active in risk management related to Chinese business as well as financial transactions and make further efforts to develop high value-added industries immune to currency movement.

kjk@koreatimes.co.kr