The Greater Chinese currencies – the Chinese yuan, the Hong Kong dollar and the New Taiwan dollar - are all on a great march upward in real terms, writes Stephen Jen in Morgan Stanley's Global Economic Forum.
In the case of China, nominal appreciation will lead the real appreciation. For Hong Kong, we believe that the Linked Exchange Rate Regime will be preserved, with a very low probability of any modification (e.g., band widening) being made to it. Therefore, the HKD will appreciate in real terms purely through inflation, with no changes in the nominal parity vis-à-vis the dollar. The TWD, as well as Taiwanese equities, will likely be greatly supported by the political developments in Taiwan.
Jen puts this down to several factors, but most significantly, to an acceptance of the inevitable in currency appreciation for the AXJC currencies:
What is perhaps more important is that virtually all central bank officials in Asia have accepted the philosophical shift on the preferred exchange rate policy. First, they now agree that the structural rise of Asia and its currencies is inevitable. Second, they no longer desire to accumulate a lot more official foreign reserves. Third, they will no longer conduct ‘level-defending’ currency interventions, though some ‘market-smoothing’ operations now and then are still possible.
However Morgan Stanley has two particular concerns, regarding the CNY: Beijing is assuming that the U.S. will avoid a recession; and that RMB policy has actually helped to fuel inflation. Widening global market turmoil, and signs of a U.S. slowdown, may lead Beijing to revise its interest rate policy, consequently impacting the RMB. Jen concludes:
... while we are strong believers that the CNY should and will continue to appreciate, we are not convinced that USD/CNY will outperform the NDF path.