Asian currencies: revaluatons urgently needed
SCMP September 8, 2003

East Asian governments and central bankers are again exhibiting head-in-the-sand postures towards currency values. In the mid-1990s, refusal to float or devalue in time was a major cause of the Asian financial crisis. This time, the posture could create a crisis in global trade relations.
The imbalance between East Asia and the US has reached grotesque proportions. Inappropriate exchange rates are beginning to damage Asian economies and make them hostage to protectionist pressures in the US. Tensions are also high over World Trade Organisation issues. Yet leaders wrap themselves in nationalist talk and persist with beggar-thy-neighbour attitudes at the same time as proclaiming Asian solidarity.

Look at what is going on. Last week at a meeting of Apec ministers in Phuket, Asian governments were mostly ganging up on a United States that wants them to liberalise their currency regimes, which would cause most to appreciate against the dollar. But they have also been complaining about each other. Japan says publicly that the yuan is too low and China is offering unfair, exchange-rate based competition. Meanwhile, they are buying dollars by the truckload in an effort to prevent the yen from appreciating. The South Koreans have been saying much the same thing, while Thais and Malaysians mutter about Chinese competition.

It is, of course, stupid of the US to blame Asia, and China in particular, for a trade deficit now more than 5 per cent of gross domestic product, and still rising. In economic terms, the fault lies with US efforts to maintain growth at any cost, borrowing rather than saving and printing money to ensure the booms in homeowner and consumer debt can continue for a while longer. This is only possible because of the dollar's pre-eminent reserve-currency role.

But it should be equally obvious that the correct response to such profligate behaviour is a decline in that currency vis a vis surplus nation currencies. That way, the US consumer buying power would be reduced and that of consumers in the stronger currency countries increased. Exchange rates are no economic cure-all, but they should reflect underlying realities. Those realities are that by the standard definition of currency undervaluation - chronic surpluses on trade and overall payments accounts, and the accumulation of foreign-exchange reserves far in excess of prudential needs - almost every country in Asia needs a revaluation.

As it is, the combined forex reserves of China, Japan, Taiwan, South Korea, Hong Kong and Singapore now total some US$1 trillion and are rising by 20 per cent a year. Does it really make sense from an investment point of view to be financing such copious amounts of foreign consumer debt which may never be repaid? And from a domestic economic standpoint, does it make sense to feed an export boom, which is evidently unsustainable, at the expense of domestic consumption? Asian governments have taken leave of their economic senses.

China has two main arguments for resisting revaluation. First, it would hurt employment in export industries. Second, it would result in lower profits and an increase in non-performing loans. Neither is very convincing. Revaluation would likely hit exporters' profits more than volume, so the burden would fall more on the foreigners who own the export factories and brand names than on employment. Domestic demand would be stimulated by lower import prices, creating more non-export employment and improving the outlook for companies catering to the domestic market - the ones most likely to face debt service problems. Those with dollar debts would benefit. Revaluation would also moderate the excessive growth in money supply, which is threatening to generate property and other investment bubbles.

One must not put all the onus for change on China. Its huge trade surplus with the US is almost matched by the combined big deficits with Taiwan, South Korea, Japan and Southeast Asia. Overall, it could be close to trade balance soon. But that simply underlines how far the whole region is undervalued. The surpluses of Taiwan and Japan are even more chronic than that of China. South Korea, Thailand and Malaysia are not far behind. A broad-based agreement to allow appreciation, whether by floating or changing pegs, would increase regional buying power and thereby further stimulate intraregional trade. But the lead can only come from Japan and China.

Now that the US consumer is about to be a busted flush, that is the only way trade-oriented economies, which for so long focused on the US market, can grow steadily. But unless they change their attitudes to revaluation, they will end up with growing currency rows between each other, as well as with the US. They all need to stop accumulating dodgy US debt and acknowledge their own worth. Once, they refused to devalue out of pride. Now, they refuse to revalue for the same reason. How bizarre.




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