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SCMP Reporter

Asia's three currency pegs will remain in place this year as global geopolitical and economic uncertainty prevent policy makers from making dramatic moves, according to Morgan Stanley chief currency economist Stephen Jen.

'The three Asian pegs will survive this year,' Mr Jen said.

However as the US dollar continues to weaken, particularly against the yen, Asian currencies with a flexible exchange rate, such as the Korean won and Thai baht, are likely to strengthen.

Mr Jen said the US dollar was only halfway through a longer-term correction and would continue to weaken against the yen, and other currencies in Asia.

'As soon as the dollar breaks through 115 [yen], all dollar-Asia levels will fall,' Mr Jen said.

He sees the dollar falling to 112 yen this year, though continued intervention from Japan's Ministry of Finance may keep it from reaching its 'fair value' level below 112 in the near term.

However, there will not be impetus this year for the three Asian countries with a peg - Hong Kong, China and Malaysia - to abandon them.

In Hong Kong, Mr Jen said there was 'a tremendous amount of commitment to the Hong Kong dollar peg', while conditions, including US dollar weakness and strong growth in China, had eased pressure to shift tactics on the nearly 20-year-old peg.

'It would take a serious knockout punch to destabilise this peg,' he said.

However, he said price flexibility and fiscal policies in the 2003-04 budget would be the key to the government's ability to maintain the peg.

Despite urging from Japan to allow the yuan to appreciate, China was unlikely to alter its exchange rate policy this year, though an economic rebound next year may pave the way for more currency flexibility, Mr Jen said.

'China should not and will not revalue the [yuan] this year, despite strong upward pressure on the [currency],' he said. There will not be 'a policy shift this year, it would cause too much of a shock'.

Under new leadership, China would focus on narrowing the income gap between the 'haves' and 'have-nots', a policy favouring a weak yuan, Mr Jen said.

The yuan's present level will allow incoming President Hu Jintao to create more jobs, maintain China's competitiveness and keep exports flowing.

'For the coming two years, the rest of the region will learn to cope with a [yuan] at roughly the current value,' Mr Jen said.

Meanwhile, there is not enough hard evidence that the yuan is grossly undervalued as China's deflation is on par with Japan and its trade surplus is under 3 per cent of gross domestic product. China also has a trade deficit with every Asian economy except Hong Kong. The total deficit against Asia is roughly double its overall trade surplus.

'Greater flexibility in US dollar/yuan and an appreciation of the yuan will be permitted in the future, but, in my view, Beijing will choose stability this year, and resist intensifying calls from overseas for a large revaluation of the yuan.'

For Malaysia, the currency peg had served it very well, Mr Jen said. '[It] gains competitiveness as the US dollar weakens and we see little benefit to changing exchange arrangements as Prime Minister Mahathir [Mohamad] exits.'



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