Pimco says yuan, won offer value on rate prospects

The case for maintaining low interest rates in Asia is weakening and there is room for exchange-rate appreciation, Chia-Liang Lian, a Singapore-based fund manager at Pimco, wrote in a report published on its Web site Friday. Pimco, which has more than US$940 billion of managed assets, owns forward contracts in the three currencies, he said in a separate a phone interview, declining to provide forecasts.

“As we head into 2010 with increased confidence that economic recovery is likely on a firm footing, the case for pre- emptive tightening in Asia should gain traction,” Lian wrote. “Asset-price inflation may help fuel inflation expectations. Tighter monetary conditions may come in the form of higher rates and currency appreciation.”

Australia and India have started to tighten monetary policy and Singapore said Thursday it will gradually pull back stimulus measures as the global economy revives. Countries in the Group of 20 have provided about US$12 trillion to revive the global economy, according to International Monetary Fund data.

Pimco, manager of the world's largest bond fund said the aggregate value of Asian currencies has declined almost 4 percent in the past year even as economic growth outpaced most other regions. He cited the so-called nominal effective exchange rate, or trade-weighted value based on a basket of currencies.

“The current estimated level is close to the low-end of the NEER range since the mid-1990s,” Pimco said. “All else equal, this would suggest room for greater flexibility and appreciation going forward.”

Korea's won has appreciated 7.9 percent against the dollar this year, the second-best performer among Asia's 10 most-active currencies after Indonesia's rupiah. The Singapore dollar gained 4 percent, while the yuan has been kept steady at 6.83 per dollar since July 2008.

Pimco's Lian also recommended investors be cautious and focus on higher-quality corporate bonds sold by real-estate companies in Hong Kong and China as central banks tighten policy.

“For dedicated corporate bond investors, policy tightening will favor high-quality credits among Hong Kong and China real estate names,” Lian said by phone, declining to provide details.

Rising property prices in Asia including Singapore, Hong Kong and major cities in China have generated “bubble-like features” in asset markets, creating doubts about the availability of “easy money,” according to the report.

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