High times

After its peg was relaxed, the yuan has seen its biggest daily gains against the US dollar since 2005 when the official rate was revalued. Since late last month there have been a series of new records highs and there are some analysts predicting the currency may appreciate by as much as 5 percent over the next 12 months. That is a good news-bad news story for Macau according to economist José Duarte. Since the pataca is pegged to the Hong Kong dollar, which is indexed to the US dollar, the local currency will tend to depreciate in value. For most people that means a loss in spending power and increased prices for essential goods. “So, immediately, the sustained appreciation of the yuan will reflect on prices of day-to-day products, since most goods consumed in Macau are from China. To sum up, this means that prices will increase,” Duarte told the Macau Hoje daily. Price rises are “inevitable” says economist José Santos due to the high dependence on imported Chinese products. “Technically, there is the possibility that the pataca may be pegged to another currency on-level with the yuan, which could make it stronger and avoid negative impacts on the domestic market,” he said. Ready to act on inflation In the latest round of CPI figures, the Secretary for the Economy and Finance Francis Tam Pak Yuen said inflation rose 2.76 percent year-on-year in May, while the general CPI reached 104.06. The rise was mainly due to a 6.6-percentage point increase in transport prices and a 4.9-percentage point increase in the cost of food and non-alcoholic beverages. In the first five months of this year, the index’s average composite CPI grew 1.98 percent compared to the same period last year. The 12-month average has increased by about 0.83 percent. Duarte believes that the inflation rate may already be feeling the consequences of the yuan’s new-found power but there was not yet a reason to despair. “It’s a plausible increase when faced with the growth of the yuan. But we must not forget that inflation at this level is no concern for anyone and it’s an imported phenomenon, since there has been a slackening of domestic demand following the departure of many non-resident workers,” he said. Tam says that “inflation remains within the control of government” and has flagged relief measures if the effects of inflation are “felt in the lives of the more underprivileged classes”. A silver-lined cloud The more the yuan rises, however, so do the profits from casinos, hotels and tourism. In the first quarter, 3.3 million mainlanders visited Macau out of 6.1 million visitors in total – an  increase of 20.9 percent over the same period last year. With the yuan gaining in value “the Chinese get wealthier” Duarte said “and may become even more crucial for tourism. “As tourism is the basis of the local economy, the more wealthy and at leisure the Chinese are, the greater is the possibility they will come to Macau to spend money in the casinos. So, we can expect more profits, since casinos are real money-making machines which do not get affected by crisis.” Tam can also see the benefit in a rising yuan, as it will boost tourism in the region. “The appreciation of the yuan will obviously affect the economy of Macau,” he told the Lusa News Agency. “If the pataca drops in value, more tourists will come to Macau, which will have a positive impact.” There is also the opportunity that mainland investment in Macau could become increasingly strategic. “More Chinese money will come in and the investment could rise significantly,” Santos said. A change in tone Until recently, the yuan has been virtually pegged to the US dollar for the past years. It is a situation the mainland’s biggest trading partners considered an “artificial undervaluation” of the currency. Ahead of the Toronto G-20 Summit the People’s Bank of China announced “more flexible exchange rates”, going some of the way towards satisfying the mainland’s trade partners. Beijing has the largest currency reserves in the world, estimated at about US$2.5 trillion and the World Bank forecasts its economy will see a 9.5 percent growth this year, up almost a percentage point on last year. Reforms aid competitiveness The reform in the mainland’s foreign exchange regime will help increase the competitiveness of the country’s exports in the global market, Ministry of Commerce spokesman Yao Jian told Xinhua news agency. Reforms could increase pressure on mainland exporters in the short term because production goods will become more expensive. Moreover, the growing cost of manpower and the European debt crisis may affect exports. But, in the long term, exporters have to improve corporate management and expand the industrial chain to improve their competitiveness. An improvement in the balance of payments, particularly a significant drop in the trade surplus, had created a solid foundation to relax the almost two-year-old peg to the dollar. The ministry has forecast a significant fall in the trade surplus this year. During the first five months of the year, the trade surplus dropped 59.9 percent. Appreciative applause Galaxy Entertainment Group’s deputy Chairman Francis Lui Yiu Tung is applauding the appreciation of the yuan. He believes it will lead to more spending on gaming, raising profits. Mainland gamblers currently contribute 57 percent of revenues to his casinos and he predicts that percentage will increase hand-in-hand with the rise of middle-class tourism. Time to act Predicting higher inflation rates that will penalise Macau’s lower-income households, the vice-chairman of the Union of the General Associations of Neighbourhoods of Macau Leong Heng Kao has proposed that the government begin sending cheques from the cash handout scheme as soon as possible. The Kai Fong spokesman has also argued for an increase in electricity subsidies, lower rents and for greater flexibility in importing essential goods. Yuan settlement extended The People’s Bank of China, China’s central bank, announced last month that the yuan settlement pilot program in foreign trade has been expanded to cover the entire world. The People’s Bank of China (PBOC) said it had expanded where Chinese exporters can use the yuan to settle trade from the original Association of Southeast Asian Nations (ASEAN) and Hong Kong and Macau to the rest of the world. It also added 18 provinces and municipalities to the program. The move comes about one year after a trial scheme was introduced in five mainland cities. According to the official news agency Xinhua, the move is part of the government’s efforts to reduce its reliance on the U.S. dollar to avert foreign exchange fluctuations, and also to increase the yuan’s international importance.