International Herald Tribune
Behind Thai currency crisis, China's heavy hand
Tuesday, December 19, 2006

Thailand has another currency crisis, which will spread unless addressed internationally. It is a mirror, albeit in miniature, of that of 1997. As in 1997, the attitude of the big countries in Asia is pressuring the smaller ones. Indeed, the Thais and others have as least as much reason to complain about China's foreign-exchange policy as does the U.S. Treasury secretary, Henry Paulson. Smaller countries like Thailand, which want to have open markets, are being forced to reconsider.

This time Thailand has instituted controls to prevent a flood of money into rather than out of its currency, the baht. The mix of an open foreign-exchange market, attractive interest rates and sound economic fundamentals had caused the baht to rise by 20 percent against the dollar over the past three years, and 7 percent in the past three months alone.

After anguished cries from exporters, it has imposed a severe penalty — a 30 percent tax — on foreign flows into baht accounts held for less than one year. It may be an overreaction by a military-installed government feeling its way. It has pushed down the baht but put stock markets across the region into a nose-dive. But given that Finance Minister Pridyathorn Devakul had a reformist, market-oriented reputation when governor of Thailand's central bank, the move should be seen as more than just a knee-jerk response.

Meanwhile, pressure is building for South Korea to impose restrictions to stem the rise in its currency, the won, which has gained 5 percent in three months and 30 percent in three years against the dollar. But the issue is not really the dollar. After all, the euro has appreciated as rapidly as the South Korean won without more than minor grumbles from European companies. The problem for Thailand and South Korea lies in the appreciation of their currencies against those of Asian neighbors, principally the Japanese yen and the Chinese yuan but also the Taiwan dollar and, to a lesser extent, the Malaysian ringgit.

The world is awash with dollars, with few places to go other than the euro and, hitherto, the minor currencies of Europe and Asia. China continues to permit only a snail's pace appreciation, totaling just 5 percent over 16 months, and Japan's reluctance to increase its almost zero interest rates merely encourages the so-called "carry trade," whereby yen can be borrowed cheaply for investment in higher- yielding currencies. The yen has been fluctuating in a narrow range and has gained less than 2 percent against the dollar in three years, while the euro and the won have been zooming ahead.

Taiwan, another economy with a massive current account surplus, is also guilty of currency manipulation to keep its currency roughly in line with the yuan and yen through a mix of ultra-low interest rates, reserve accumulation and administrative measures.

In practice, the smaller economies may be overreacting to the dangers of currency volatility. After all, New Zealand has long lived with huge swings in its currency, as has Australia to a lesser degree. Nonetheless, the Thai actions are symptomatic of the lack of currency coordination in the Asia-Pacific region, despite numerous public-relations statements following regional meetings of central bank governors and finance ministers.

Even the Asian Development Bank, not known for criticizing its members in public, has noted the gap between rhetoric and reality on currency issues. A senior bank official, Masahiro Kawai, whose brief until recently was regional economic cooperation, was exasperated enough this month to call publicly for Asian economies to allow their currencies to appreciate in unison against a falling dollar.

Kawai warned against allowing sharp swings within the region. But that is just what has happened. The baht and won in particular, and Singapore, Indonesian and Philippines currencies to some extent, have risen steeply against the Japanese, Chinese and Taiwanese units, all of which have accumulated vastly excessive amounts of foreign exchange reserves.

South Korea competes with Japan and Taiwan. The Southeast Asian economies must compete with China for long-term investment capital. Instead, short-term financial flows are making them less attractive for manufacturing than China, which keeps its currency depressed to attract capital and bolster exports. Unfortunately these countries are all too much in thrall to China to say so publicly. They need to condemn China and Japan for their complete failure to show regional leadership on an issue that matters deeply to all their neighbors.