Effect of CNY appreciation on other Asian currencies not obvious

A significant contribution to the effective exchange rate appreciation of CNY came from the relative weakness of other Asian currencies, especially the Japanese yen, but also the Korean won, Taiwan dollar etc. In fact, most Asian currencies depreciated substantially against the RMB, giving these economies an increasing competitive edge against China. 

"There is really no basis on which to argue that China's currency regime shift will add to downward pressure on other Asian currencies because of a loss of competitiveness against China. As we show in the graphs on this page, the CNY remains close to its strongest level against practically all major Asian currencies, meaning that all these economies are holding on to the competitiveness gains they achieved against China. It is therefore highly unlikely in our view that other Asian governments will attempt to unleash a tit-for-tat process of competitive devaluations. Vietnam, which widened the trading band of its currency right after China's move, is likely to be the exception rather than the rule", states Societe Generale. 

The magnitude of the appreciation of the CNY just since the start of 2005 has been quite impressive, ranging from a moderate 7% against the Singapore dollar to a drastic 60% against the Indonesian rupiah - and that is post 11 August, the day China announced the change. Note that according to UNCTAT, the economies with the highest degree of export similarity to China are Thailand, Vietnam and Korea, all currencies against which the CNY has appreciated by more than 10%, followed by the Philippines and Malaysia.

This is not to say that other Asian currencies will not continue to depreciate against the US dollar, they are expected to do so as the US dollar gains support from the Fed's expected "lift-off", adds SocGen. But given the past depreciation against the CNY, some gains by local currencies look fundamentally more justified than further declines.