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Friday, July 22, 2005

Depegging the Ringgit, floating the Yuan

There are plenty of articles on the web describing the impact of the recent move of the Central Bank in Malaysia, the depegging of the Ringgit away from its current exchange rate of RM3.80 to US$1 and the float of the Chinese Yuan to

So let me summarise this, plus include some own points of view. It is open to discussion.
What can be stated so far:


  • It was a clear reaction to China's move to unpeg the Yuan
  • It has been decided months ago by the Malaysian government that the moment, the Chinese government reacts with its currency, Malaysia would follow immediately
  • It is clear that this gives the Central Bank a freer hand in managing inflation. Inflation in Malaysia grew over the last couple of months and was above the interest rate of banks - the effect was that savers lost money. Inflation was cost-based - imported - thus, it wasn't possible to battle against it, if the peg remains. Inflation didn't increase because of excessive demand from the population. Following the depegging of the Ringgit, it is also expected that interest rates will increase in the coming months (may be after the next increase of Basis Points by the Feds in the US next month).
  • Clearly, it is a relief for many companies that are dependent on imports of raw material, since their cost will be reduced. Initially not significant, but at least by some percent - crucial in today's environment. Companies that borrowed money overseas will be happy. One such company is Tenaga Nasional, already announced that the will gain from the move, since it is Malaysia's biggest foreign currency borrower. The electronics industry in Penang will also sigh with relief. The media industry will be less burdened with newsprint costs while the automotive industry will experience a lower spending on imported parts
  • Companies that export products with cost nominated in Ringgit will experience some negative effects - the plantation industry is an example. The price for palm oil has already dipped on the world market, however, ongoing demand will push prices to higher demand again in the nearer future. Airliners, such as Air Asia, and even MAS should announce cost savings from the move, since their operations are dollar-based


  • The appreciation of the Yuan is only 2% - not much compared to the demands and calls by European and German governments for an increase of up to 40%. However an immediate upgrade cannot be expected, since this would great turmoil in the economy. Nevertheless, the US government calls this small increase "baby steps". But let's say that this is also aimed at easing upcoming trade negotiations between the Chinese government and the US government during an upcoming visit
  • The move by the Chinese government will (as stated by the government) increase its monetary independence, it says it also improves its effectiveness of financial controls, help maintain the basic balance of imports and exports to improve trade conditions, stabilize prices and cut corporate costs - that's a mouthful, isn't it? The move could nonetheless help Chinese exporters' profits by cutting costs for imported oil, iron ore and other raw materials whose prices have been surging in dollar terms. Probable also pushes up the price of Chinese exports to the United States and Europe, however Wal-Mart and other US retailers don’t yet see a major impact on their prices
  • The Chinese government will not reveal the composition of its currency basked, to avoid currency speculation - a good move.

(By Asia Business Consulting)