China’s Economic Reawakening Boosts Asian Currency Market

The termination of China’s zero-COVID policy is leading to an increase in the value of various Asian currencies, as people expect an increase in tourism and commerce and a reduction in the pressure caused by U.S. monetary policy.

At one point on Monday, the Thai baht experienced an appreciation and reached as low as 32 against the dollar, which is its strongest performance since March 2020. The Singapore dollar remains in the low 1.30 range, which was last seen in January 2018, and the South Korean won reached 1,215 against the dollar on Thursday for the first time since April 2020.

As a whole, emerging-market currencies have been regaining strength, as expectations of the U.S. Federal Reserve slowing down interest rate hikes are controlling the earlier upward trend of the greenback.

However, since November’s end, Asian currencies have outperformed others, shortly after China reversed its approach to the coronavirus. Over this period, the baht and won have gained 6.5% and 6.3%, respectively, compared to the Mexican peso’s 3.2% and the South African rand’s 0.7%.

“Asia is the region that will see the most benefit from China’s economic reopening,” said Toru Nishihama of the Dai-ichi Life Research Institute.

An increase in Chinese travelers visiting Asian destinations has been a driving factor in the boost of Asian economies. This is particularly good news for Thailand, where tourism made up a fifth of the country’s GDP in 2019 and a quarter of the 40 million foreign visitors that year came from China. The country was the top destination for Chinese travelers during this year’s Lunar New Year holiday.

In countries like South Korea and Taiwan, there is a focus on exporting industrial products to China. The Indonesian rupiah and Malaysian ringgit have also seen a boost due to the potential rise in exports of natural gas and crude oil.

The rise in these currencies is attracting capital back to Asian bond markets. Data from EPFR reveals an inflow of $264 million into Asian bond funds outside Japan in January, after 11 straight months of outflows since last February.

In the stock market, the MSCI China Index rose by 12% in January, outperforming the 6% gain of the MSCI World Index. The South Korea and Taiwan indexes also outperformed the global index.

“Apart from the strong consumer spending in China during the Lunar New Year and the anticipation of slower interest rate hikes in the US, there is also rising optimism for Taiwan and South Korea, particularly in the semiconductor industry,” said Mutsumi Kanamori at Daiwa Securities.

China’s economy is showing signs of improvement, as indicated by the manufacturing purchasing managers’ index which came in at 50.1 for January, crossing the boom-or-bust line of 50 for the first time in four months.

However, the long-term outlook remains divided. There are questions about consumer spending, as retail sales of consumer goods decreased by 0.2% in 2022, but household bank deposits increased by 17.8 trillion yuan ($2.63 trillion). Some analysts believe the excess savings accumulated during the pandemic will drive future spending, while others fear it may not fully make up for the big decline in 2022.

Another risk comes from demand from the US and Europe, as China’s exports and imports each fell by 7% in the fourth quarter of 2022, marking the first quarterly decline in two and a half years. If interest rate hikes lead to economic slowdowns in the US and Europe, it could affect China’s exports.

There are also concerns that a recovery in China’s economy could contribute to global inflation, just as prices are settling down. Tomoyuki Ota at Mizuho Research & Technologies predicts that a recovery in the manufacturing sector would raise commodity prices by 3%. If renewed inflation damps hopes for rate cuts in major economies, money could start flowing out of emerging economies.

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