Baring Asset Management Welcomes Chinese Decision to Revalue the Yuan.

BOSTON -- Baring Asset Management (BAM), the global institutional investment management firm, welcomes the Chinese decision to revalue the Yuan saying it is a very positive development for investors in the region as a whole.

C. Hayes Miller, CFA, Head of BAM's North American Investment Management Team and a member of the firm's Global Equity Group and Strategic Policy Group, welcomed the news that the Chinese Yuan will no longer be pegged to the US dollar, but that it will be allowed to float in a tight band against a basket of foreign currencies, describing it as the start of a process which will see value unlocked in a whole range of Asian assets, including currencies and equities.

"Although the timing of this change is somewhat earlier than many market participants expected, which was to see it happening ahead of Mr. Hu Jintao's visit to President Bush in September, the size and extent of the revaluation was what we have been predicting for the past twelve months," said Mr. Miller.

Effective immediately, the Yuan has been revalued by 2%, and will be allowed to trade in a tight 0.3% band against a basket of foreign currencies, said the Chinese government, without specifying which currencies.

Continued Mr. Miller, "Ultimately we believe this was a political decision as China wants to avoid a potential trade war with the US. Had it not been for the political pressure from the US, it seems likely that China would have kept the exchange rate unchanged. Although we expect the currency to continue to appreciate over time, we do not expect to see another re-valuation any time soon. Our thesis has always been that they will allow the Yuan to appreciate in baby steps over a long period of time, and we expect plenty of time for this adjustment to be absorbed by industry before further changes are made.

"We believe this policy change is positive because it will encourage assets to flow into the region. Already, the Yen has risen by 2% and the Indian Rupee has strengthened as investors respond to the news on the Yuan."

Baring Asset Management has long argued that not only are Asian equities undervalued, but that Asian currencies are undervalued too.

Added Mr. Miller, "What's also welcome is this change in policy by the Chinese authorities should encourage Asian central banks to allow their money supplies - and their currencies - to rise. Historically, these banks have sought to keep their currencies stable by balancing inflows into their financial systems with matching deposits offshore - a process known as 'sterilization'. We do not expect this to change overnight, but we should start to see a gradual move in the direction of greater currency freedom."

Mr. Miller noted that in the short term, the immediate reaction in the market is likely to be that a number of Asian or global manufacturers, which have production facilities in China or buy significantly in China may be adversely affected. This is likely to be seen in the automobile industry, among textile and consumer durable manufacturers, and in a number of Taiwanese downstream technology companies, as well as in companies such as Wal-Mart. At the same time, companies exporting to China are likely to benefit.

"As far as the Chinese equity markets are concerned," he said, "the 'H' share index, including many of the likely beneficiaries, has been rising strongly for the past two days or so perhaps a number of investors had started to anticipate this change. Whether the immediate reaction by investors is going to last is questionable. We suspect that, as always, the reaction will be exaggerated, then revert back to a more normal level as the fundamentals reassert themselves.

"This does not significantly alter our positive view on Asian relative to Western stocks. In fact, to the extent it attracts capital into Asian market on further currency speculation, it will be a positive for Southeast Asian equities. However, if the revaluation reaches 10% through time, then the investment case begins to change to favour Western companies, particularly those with significant transactional and translational exposure to Asia."

About Baring Asset Management

Baring Asset Management (BAM) is a global investment management firm that manages approximately $35 billion on behalf of governments, institutions, charities, private clients and mutual fund investors located around the world.

Within North America, BAM provides asset management services to institutional investors, offering them a range of equity and fixed income products in both domestic and international markets from their offices in Boston, San Francisco and Toronto.

BAM follows a Growth at a Reasonable Price (GARP) equity investment strategy. Its approach focuses on identifying favorable earnings surprise and valuation characteristics through fundamental research, and it seeks companies, sectors and markets whose attractive growth prospects are not fully reflected in their prices.

Baring Asset Management is part of the MassMutual Financial Group, a global, diversified financial services organization. Massachusetts Mutual Life Insurance Company (MassMutual) is one of the largest life insurance businesses in the USA. More information about Baring Asset Management can be found at www.baring-asset-us.com.