The first log may have been removed from the jam, but
there is much work to be done before East Asian currencies are freed
from the grip of mercantilism and allowed to rise to levels
reflecting the international competitiveness of their economies.
China's ending of its
11-year old peg of 8.28 yuan to the dollar may seem like a victory
for U.S. pressure. But unless followed not just by further steps by
China but equivalent ones by Taiwan, South Korea, Japan, Malaysia
and others, it will do little to right the imbalances in
international trade and finance. The first signs have not been
encouraging, with these countries appearing to resist even going
along with China's modest move.
China had a choice: to
go for a significant revaluation - say 15 percent - and then move to
a managed float against a basket of currencies, or to end the peg
with a baby step while making only a small move toward a meaningful
revaluation, merely hinting that more might follow.
It chose the latter,
which may be politically most convenient at home. It is small enough
to have no impact on trade yet conforms to a promise made more than
three years ago to end the peg when the time was ripe. It will
presumably buy some time with the U.S. administration and even with
a Congress seemingly itching for a confrontation with China.
It is also well timed,
coming when the Chinese economy is growing faster than official
expectations and after a huge rally in the dollar. Assuming that the
dollar rally is short-lived, China will then be able to take further
small steps, raising the yuan against the dollar while keeping it
steady against the yen, the euro, the won and other currencies.
small step also carries with it several dangers. The first is that
unless it is followed by further steps between now and September,
taking the appreciation toward double digits, it will do little to
mollify China's critics and avert threatened trade sanctions. The
second is that expectation of a series of small steps can only lead
to further floods of speculative money into the yuan. That will
exacerbate China's excessive monetary growth, which has instigated
real estate and fixed investment binges. China's capital controls
are insufficiently watertight. Third, it will delay the stimulus to
consumption that a higher currency should bring by reducing the
costs of inputs like energy and steel, which are far more
significant for China than for service-oriented developed economies.
Despite the fact that
most East Asian economies are dependent on imported energy, most
continue to rack up huge trade and current account surpluses.
Tsunami-hit Thailand is the only exception. Despite oil, the current
account surpluses of Japan, Korea and Taiwan are likely to be at
least 3.5 percent of gross domestic product, probably more than that
of China. Meanwhile energy-exporting Malaysia's surplus is now over
15 percent and still rising. Everywhere in the region, governments
are complaining about the dampening effect on consumption of higher
energy prices, but failing to use currency appreciation to offset
it. In practice, exporting continues to be worshipped, consumption
to be discouraged.
Often irrational fear of
Chinese competition has deterred East Asian countries from allowing
their currencies to appreciate. The U.S. is partly to blame too. It
has focused its pressure almost entirely on China rather than on
those other countries with bigger overall surpluses. China's huge
surplus with the United States is largely a consequence of the use
of China by Japanese, Taiwan and Korean manufacturers as a base for
exporting to America. China has an overall deficit with East and
The reaction so far to
China's move has been extremely disappointing to those looking for
broad and effective Asian realignments. Malaysia has, at last,
abandoned its own dollar peg but so far allowed only a minuscule
appreciation of the ringgit. The yen took an initial leap but then
fell back on fears of official dollar buying and remains 9 percent
below its level at the start of the year. The won and Taiwan dollar
continue to be manipulated, mostly to track the yen.
American and European
focus on China even as the bigger problems lie with other Asian
currency values remains an obstacle to the general realignments that
the global economy badly needs. China's resistance to change has
been strengthened by focus on its surplus to the exclusion of
Attention needs to shift
toward those others - all open, capitalist and more developed market
economies - if China is now to be helped to make quick, if small,
steps to a meaningful revaluation. The failure of that to happen
will not only threaten trade, it will exacerbate the already
worrying level of political tensions between a deeply indebted
America and a rising China.