Pressure from the Group of 20 largest economies may spur China to allow its currency to appreciate against the US dollar within months, according to Morgan Stanley.
"It's going to be more and more difficult for China to stay pegged" after the G-20 yesterday called for emerging-market Asian countries to follow more flexible currency policies, said Stephen Jen, global head of currency research at Morgan Stanley in London. China has kept the yuan pegged at about 8.3 per US dollar since 1995.
G-20 finance ministers and central bank governors in a joint statement after meeting in Berlin called for "steps toward greater exchange-rate flexibility" in emerging Asia.
By contrast with China, South Korean officials have allowed the won to gain to a seven-year high against the US dollar in the past week, while Taiwan's New Taiwan dollar climbed to the strongest level since 2001.
"It is quite clear from the G-20 that the Asian currencies are going to appreciate, and every one has appreciated except one," said Jen.
"I'm confident they will de-peg and it's a matter of months," said Jen, who previously was an Asian currency strategist at Morgan Stanley based in Hong Kong. Jen also used to work at the Federal Reserve in Washington.
Chinese policy makers may set the yuan's value against a basket of foreign currencies, and allow it to rise or fall within a set band, Jen said.
Asian countries will likely allow their currencies to strengthen against the US dollar but by how much and when depends on whether China takes the plunge and revalues the yuan, economists say.
"If the yuan was to be revalued, that will allow some of the other currencies to strengthen further," said Nizam Idris, the head of research at IDEAglobal in Singapore.
"The Japanese yen, the Korean won, the New Taiwan dollar will rise against the US dollar and that will lead to movements in other regional currencies."
Thio Chin Loo, a Singapore-based currency strategist with BNP Paribas, said the market has already priced in the yuan being revalued by about 5.0 percent.
"We think [Beijing] will take a gradual approach to foreign exchange reforms. The most likely timing for the change is still the second half of next year," Thio said.
Nizam agreed with the 5.0 percent figure but said recent indications from Beijing were that the yuan could be revalued more quickly than the market had been expecting.
Nizam pointed to Chinese President Hu Jintao's (胡錦濤) comments to US President George W. Bush during their weekend meeting at the APEC summit in Chile that Beijing planned to loosen the peg, although only under the right conditions, as the most notable signal.
Nizam said Asian governments would accept their currencies strengthening against the US dollar as long as they were not doing it alone and losing export competitiveness to their regional rivals in the US market.
"If everybody were to revalue their currencies at the same pace, one country would therefore not be affected. In Asia, exports to the United States will be affected but [this] will be shared," he said.
Nizam also pointed to domestic economic considerations making stronger regional currencies more palatable next year.
"While export-led growth may be a concern, the other side of the story is that stronger currencies may address inflationary concerns," Nizam said, pointing to high world oil prices and their potential impact on overall costs.