April 14 (Bloomberg) -- Now that Singapore has done it, the big question for the global investment community is whether China will follow suit.
Responding to rising commodities prices -- especially the intolerable surge in the cost of imported food -- the Monetary Authority of Singapore last week signaled its preference for a stronger home currency.
What the monetary authority said it would do is to reset the middle point of the (undisclosed) band in which the Singapore dollar is allowed to fluctuate against a basket of (unnamed) trading partners' currencies.
The new center, which market participants can and do fairly accurately guess, would be the current level of Singapore's nominal effective exchange rate.
``It amounts to a de-facto revaluation,'' V. Anantha- Nageswaran, head of research for Asia and the Middle East at Julius Baer Holding AG, wrote in a note to clients.
Singapore's anti-inflation stance is for the good of its 4.6 million residents and its status as a financial center; were China to do something similar, it would be for its own benefit as well as in the interest of the world community.
Can China use a stronger currency to tame the intolerable 23 percent pace at which its food prices rose in February from a year earlier? It can, but only if the appreciation in the yuan takes the form of a large, one-off revaluation.
Speculative Flows
The current regime of fairly rapid appreciation is counterproductive because it ``will only encourage hot money flows,'' Michael Pettis, a Peking University professor of finance, says on his Web log.
A revaluation in the Chinese currency could -- apart from helping China to rein in prices -- also provide an opportunity for other countries in the region to tame inflation.
With export competitiveness as less of a constraint, Asian nations would rather let their currencies appreciate than raise interest rates in an environment of slowing global growth.
Of course, anything like, say, a 20 percent revaluation in the yuan could badly spook already jittery financial markets.
So perhaps the best time to announce it would be just after the Olympics -- as a kind of return gift to the participating nations. By then, of course, there's a chance that it may not even be needed.
Slowdown Predicted
According to several analysts, there's already enough slowdown in the world to deflate the commodities bubble.
``Commodity prices are going the wrong way,'' says Simon Johnson, the chief economist at the International Monetary Fund, which recently estimated the likelihood of a global recession -- led by a slowdown in the U.S. economy -- at 1-in-4.
``A slowdown in OECD energy demand -- 60 percent of the total -- is clearly already under way and likely has further to go in 2008,'' says Fitch Ratings. ``A weakening U.S. economy, coupled with the forecast slowdown in Chinese GDP growth to 9.7 percent from 11.4 percent in 2007, the slowest in six years, is likely to take a further toll on metals demand.''
Fitch wrote that report before China last week raised its estimate for last year's growth to 11.9 percent. That prompted Goldman Sachs Group Inc. to say the Chinese economy will grow faster than 10 percent in 2008.
That may be too high to cause an appreciable slump in China's hunger for commodities.
Carry Trade
A halt to the rapid buildup of fixed-asset investments in China, which accounted for 90 percent of the increase in the consumption of four key base metals from 2005 to 2007, is an imperative.
It isn't a certainty, though -- the opposite might happen.
``Beijing will respond to a slowing external economy by boosting the domestic economy, especially fixed-asset investment,'' Citigroup Inc. commodities analysts Alan Heap and Alex Tonks wrote in a report this month. ``There is still a lot of infrastructure to be built.''
What about food?
Fitch says food supplies can get scaled up more quickly in the short run than, say, oil or metals.
``This points to the likelihood that high food-price inflation will prove less protracted than oil and metals inflation,'' the ratings company says.
That forecast may well come true.
For the moment, though, it looks like agricultural commodity prices will remain uncomfortably elevated unless there's a large deceleration in biofuel demand or an end to the growing hunger for protein in China and India.
No Return Gift?
What if the global recession fails to materialize, or is too shallow to produce a large disinflationary shock?
In that case, will China revalue the yuan to cool its economy and curb inflation?
If China fails to ``import'' a soft landing through a ``U.S.-led global downturn,'' it may seek to induce one through a ``large revaluation of the exchange rate,'' says Morgan Stanley economist Qing Wang in Hong Kong.
``This is the most likely alternative scenario,'' Wang wrote in a March 27 note to clients.
Ultimately, China won't do anything drastic, unless its domestic inflation, already at an 11-year high of 8.7 percent in February, continues to worsen.
As for the Olympic spirit of universal brotherhood, China can always point to the bad behavior of its guests -- who are suddenly getting all worked up over Tibet -- to deny them a return gift.
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