Asian currencies: revaluatons urgently
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
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
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
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.
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