ING’s Gupta: Yuan to become reserve currency in two years

ING Investment Management Asia’s CIO believes the yuan will become a reserve currency within the next two years driven by the ongoing debt problems in Europe and the US.

Pranay Gupta says the yuan will continue to appreciate despite as China seeks to control inflation and assets continue to move away from developed markets.

“For the moment therefore, despite what happened in the CNY last week, one should rule out sudden revaluations of the CNY in favour of continued gradual appreciation. What is happening however as a result of the US and European crisis, is a much faster pace at which the CNY will become a core reserve currency, and acquire safe haven status,” he said.

“Spurred both by the demand from central banks around the world, and perhaps the solution to China’s problem of local government debt, one should not be surprised if the CNY acquires this status within the next two years.”

In contrast, Gupta is less positive on the US and the eurozone, maintaining the biggest and most developed nations in the world have ‘over-extended’ themselves.

The CIO says the recent deal to extend the debt ceiling in the US only has value, if it is accompanied by real expenditure cuts. However, given the greater political divide ahead of a presidential election in late 2012, he believes any real decisions will not take place until 2013.

“While the core of the cake remains rotten however, the chefs will still try to make the icing as nice as possible, hoping that the poor souls in other countries will still buy the cake, as this is the best bakery in town, and the cake looks so good. Interest rates will remain low to facilitate any growth possible and an easy monetary policy will continue in all respects,” he said.

The low interest rates mean the US dollar will continue to depreciate, increasing the speed at which assets flow to the emerging markets and the CNY becomes a reserve currency, he added.

In regards to Europe, Gupta concludes that recent events show that real monetary union is not possible without fiscal integration.

“The EU therefore has one of two choices – either to dilute or break up the monetary union, or pursue greater fiscal integration. I for one believe that they will attempt the latter, and hope they are able to implement this as a viable solution to the current crisis, before the financial markets give up on them,” he said.


This article first appeared in Professional Adviser Hong Kong.

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