Yuan to Still Take Backseat to Yen by 2027: Morgan Stanley

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  • China’s currency predicted to be fourth most-traded in 2027
  • Asian financial integration should boost equities, bonds

While China’s financial markets are likely to develop significantly over the coming decade, use of the nation’s currency in the global financial system will continue to lag behind, according to Morgan Stanley.

"While the yuan could move into No. 4 in global foreign-exchange trading over the 10-year horizon of our report, it is unlikely to challenge the yen for leadership in Asia in this regard," Morgan Stanley analysts wrote in a note on the future of Asian finance to 2027. The dollar and euro are first and second most-traded currencies.

The forecast reflects the view of a number of observers that China’s role in the global economy will continue to vastly outweigh its currency’s presence in financial markets. A botched 2015 move to embrace greater volatility in the yuan spooked investors around the world, and spurred Chinese officials to tighten capital controls, rather than loosen them.

Lately, with the yuan on the rise again, hints have come that regulators will ease up on controls. The Morgan Stanley strategists, including Jonathan Garner in Hong Kong, anticipate that to happen over the coming decade, "with a better than 50 percent chance that full convertibility is achieved by 2027."

Among other projections in the 51-page report are:

  • Asia’s stock market capitalization will double to $56 trillion over the next 10 years, overtaking North America, with China and Hong Kong the biggest source of growth.
  • India’s stock market will rise the fastest among major players, rising to exceed $6 trillion.
  • Total insurance assets for the region’s five key markets (China, Japan, Korea, India and Australia) will reach $20 trillion by 2027 from $7 trillion in 2016.
  • Rapid growth in the Asian dollar bond market, now approaching $1 trillion, will continue, with local and regional ownership levels continuing to climb, reducing credit risk premiums relative to global peers.
  • Foreign-currency bonds now make up 3.3% of Asian credit excluding Japan, up from 1.7% in 2007. There’s still room to grow: in Europe, the ratio is 6 percent.
  • Households are likely to diversify away from bank deposits. While Japanese have about 53% of assets in deposits, and Asia excluding Japan has 44%, western Europe has just 30% and North America 14%
  • The cost of equity could decline by 150 basis points over the coming decade in Asia.

— With assistance by Emma O'Brien

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