China’s motivation gives clues

Although it still remains largely a matter of conjecture, the motivation of China's policymakers for shifting the currency regime does give clues about the likely impact on the currencies of other Asian economies. The main objective, aside from liberalization to achieve inclusion in the SDR basket, was to stop what was becoming an increasingly inappropriate as well as rapid appreciation of the effective exchange rate, argues Societe Generale. This was the result of managing the exchange rate vis-a-vis the US dollar, first in an appreciating crawl from mid-2005 to end-2013 (with a two-year pause from mid-2008) and then in a narrow range until August of this year (with a slight depreciation). 

"For the first six years of this regime the effect on the effective exchange rate was muted by the fact that the US dollar was on a downtrend, but for about the past year the dollar has been appreciating, and rather rapidly. As a result China's effective exchange rate began to appreciate at an accelerating rate", notes SocGen.

Coming on top of an appreciation of some 35% in nominal terms and 45% in real terms, this exchange rate strengthening became increasingly inappropriate. Institutions such as the IMF but also the US Treasury had stopped characterising the renminbi as undervalued, meaning that the risk of it becoming overvalued was materialising. In other words, the exchange rate regime is an attempt to stop, or at least slow the rate at which the RMB was appreciating.