The unbridled appreciation of Chinese currency will not be halted by uncertainties about the economy's short-term economic outlook, according to new research by AllianceBernstein.
The investment manager says the strength of structural factors, rather than the weakness of cyclical ones, will see the renminbi continue to improve its tradeability, valuation and prestige for the foreseeable future.
According to AllianceBernstein director for Asia Pacific fixed income Hayden Briscoe, the currency will appreciate by 2-3% a year on average, just to keep pace with the country's persistent trade surpluses, and by up to 5% a year once economic rebalancing is factored in.
Briscoe adds that the gap between the US and Chinese economies in purchasing power parity is likely to close in just a few years.
Investors can benefit from an appreciation in the Chinese currency by holding renminbi-denominated assets as many emerging markets local currency debt funds do.
A higher renminbi could also hurt Chinese exports by making it more expensive for overseas economies to by goods, resulting in an increased focused on the Chinese consumer. This would benefit investors in emerging markets or China specific funds because most portfolio managers have already positioned to take advantage of the theme.
AllianceBernstein is already predicting that the renminbi will be more commonly used as a reserve currency.
"The renminbi already fulfills two of the three criteria necessary to become a reserve currency-the size of the underlying economy and the credibility of the currency itself. It is progressing steadily towards fulfilling the third criteria, which is openness and financial-market depth," explained Briscoe.
Internationalising the currency is one of the goals under the country's five-year plan and, in early September 2012, Dai Xianglong, a former People's Bank of China governor, said that China could liberalise its capital account as early as 2015.
"While the precise timing will depend somewhat on global economic and financial-market conditions, we think the RMB is likely to be internationalised much faster than widely expected," Briscoe added.