Regional currency revaluations in order
PHILIP BOWRING, SCMP December 30
The overdue weakening of the US dollar has only just begun. It will
be a great, if gradual, relief to Hong Kong. But there could be some
regional currency traumas along the way affecting the future relationship
between the Hong Kong dollar and the yuan.
The latest dollar reverse may have been due to fears of the global consequences
of US President George W. Bush's war-mongering. But war or no war, the
dollar's destiny has been spelled out by none other than Alan Greenspan
and his fellow Federal Reserve Board member Ben Bernanke.
Mr Greenspan said recently: ''There is virtually no meaningful limit
to what we could inject into the system were that necessary.'' Mr Bernanke
was even more explicit: ''The US government has a technology called
the printing press [or today's electronic equivalent] to produce as
many US dollars as it wishes at virtually no cost.'' He elaborated on
how to deliberately lower the price of the dollar by increasing supply.
Granted, their remarks were calculated to address fears of deflation,
as prices have remained almost stable despite large injections of money
and financial stimulus. But they say much about the forces driving monetary
Producing dollars may be cost-free to the US government. The cost is
ultimately borne by the foreigners who have enabled the US to run a
current account deficit in excess of 4 per cent of GDP. Dollar strength
since the collapse of the technology bubble has been due not to individual
foreign investors but Asian governments, notably China and Japan.
In pursuit of short-term, predatory trade goals, Japan has been investing
in dollars instead of consuming at home; China has invested in domestic
projects, which should have far higher rates of return than US household
The US is destined by the political cycle to try to sustain consumption-led
growth despite its huge household debt levels. It is required by the
confluence of impending war, declining tax yields and tax-cut stimulus
to run a huge financial deficit. It is going to need very lax monetary
policy to keep treasury yields down. The cost of this is borne by the
dollar. It is worth 15 per cent less than a year ago, and could fall
From an Asian perspective, the main problem of a weak dollar is as
much fear of each other as of impact on US demand. The Plaza Accord
in 1985, which led to a rapid decline of the dollar against European
and Japanese currencies, was followed by revaluations of other trade-surplus
countries such as Taiwan. It would be reasonable to see a repeat of
this, although through the market rather than political muscle. Most
Asian currencies, which fell sharply in 1997-98, are now conspicuously
undervalued. Those declines, driven by capital movement more than trade
imbalances, were overdone.
All other things being equal, one might expect the South Korean won,
Taiwan dollar, Thai baht and the Australian dollar to weather an appreciation
of at least 25 per cent against the dollar. In turn that would go some
way to restoring Hong Kong's competitiveness. However, the problem lies
with China and Japan. No country in Northeast Asia can currently afford
to see its currency appreciate too much against the yen and none in
Southeast Asia against a dollar-pegged yuan.
Japan's insistence on a weak yen is driven by domestic deflation considerations
rather than by external circumstances. In practice, Japan may not be
able to prevent the yen from rising along with the euro. But neighbours
must demand that Tokyo not use currency policy as a substitute for domestic
Likewise, Asian countries must talk to China about a revaluation. The
competitiveness of Chinese exports is shown by its trade surplus. It
now has a much larger surplus with the US than that of Japan, and also
a large surplus with Japan. All this is thanks to its 1995 devaluation
and subsequent influx of foreign investment into export industries.
The Sino-US relationship will sour quickly if a fall in the dollar
simply increases China's surplus at the expense of other suppliers.
Asian countries will also, rightly, be angry at China's abuse of capital
controls. To fail to revalue when everyone else is effectively doing
so would be damaging to China's long-term interests in the region.
What does this say about the relationship between the yuan and the
Hong Kong dollar? First, a big fall in the US dollar would be a relief
to Hong Kong. It should become the platform for shifting to a floating
rate, or a peg to a basket of currencies. Likewise, the yuan needs to
move in the opposite direction but then settle to a managed float or
basket. There is no logic in the yuan and Hong Kong dollar having the
same rate against the US dollar now. But it is possible to see the relationship
between the two stabilising, with both pegged to a basket containing
yen, euros, won and even Taiwan dollars. But there will be plenty of
currency market and diplomatic sparks before we get there.
Philip Bowring (firstname.lastname@example.org) is a Hong Kong-based journalist
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