Currency wars defused as renminbi rally spreads

China is helping its Asian neighbors stay out of the global currency wars.

Policymakers in the world's biggest exporter have resisted weakening the yuan as economic growth slows, seeing exchange-rate stability as key to winning global reserve-currency status from the International Monetary Fund this year. That in turn has reduced pressure on China's regional export rivals to keep their products competitive with weaker exchange rates, according to BlackRock Inc, the world's largest money manager.

"We don't expect a large depreciation of the yuan," Joel Kim, the head of Asia-Pacific fixed income at BlackRock, which oversees $4.77 trillion, said in an e-mail interview. He predicted that Asian currencies will outperform peers in other emerging markets. "If they would do something like that, for the rest of Asia and the rest of the world it would obviously set off another round of competitive devaluation."

Foreign-exchange traders have started to take notice. As of last week, the Bloomberg JPMorgan Asia Dollar Index had strengthened 2.2 percent from an almost five-year low on March 13, its biggest gain in 18 months, while the average cost of options to sell nine Asian currencies against the dollar dropped to the lowest since Dec 3 versus bullish contracts.

Taiwan, South Korea and Singapore have the highest export exposure to the Chinese mainland among Asian peers, according to Roy Teo, a Singapore-based strategist at ABN Amro. He raised his June forecast for the won by 1.8 percent to 1,100 per US dollar, while increasing forecasts for the yuan and Taiwan dollar by 0.8 percent and 1.3 percent, respectively.

The yuan will probably end the year at 6.20 to the US dollar, according to the median of 36 analyst estimates compiled by Bloomberg.

The yuan depreciated in the first two months of 2015 as traders speculated the People's Bank of China would join other central banks in using weaker exchange rates to support growth. The rebound began on March 3 after PBOC Deputy Governor Yi Gang said the currency "will remain very stable in the future".

Premier Li Keqiang drove the point home two days later by saying in a report to lawmakers that the exchange rate would be kept at a reasonable and balanced level. While eschewing currency weakness, policymakers have relied on interest-rate cuts and reduced reserve requirements at banks to bolster economic growth.

The Chinese government has been pressing the IMF to include the yuan in its Special Drawing Rights basket, a key endorsement for reserve-currency status, as authorities challenge the hegemony of the US dollar and a global economic order dominated by the United States and Europe. The IMF will conduct its twice-a-decade review of SDRs in October.

The yuan has rallied 1.1 percent against the US dollar in Shanghai from its March low, while Singapore's currency climbed 3.2 percent and Taiwan's dollar advanced 2.9 percent. The won gained 2.6 percent.

There is still scope for the yuan and its peers to weaken against the dollar when the US Federal Reserve raises interest rates later this year, according to Teo.

"Relative yuan stability won't completely keep Asian currencies from weakening against the dollar, but it does help ameliorate the degree of weakness in others," Sacha Tihanyi, a Hong Kong-based senior currency strategist for emerging Asia at Scotiabank, said by e-mail.