HONG KONG: Asian currencies are on the move from the business pages to the front page. Just as the overvaluation of Asian currencies in the mid 1990's helped create conditions for the Asian financial crisis, so undervaluation now is an obstacle to restoration of global financial equilibrium.

It will need tough political decisions as well as clear economic assessments to bring about change. Before that, expect sharpening exchanges of words. Among others, the U.S. Senate is now on the case.

Expansionary U.S. policies and a strong dollar helped the wider world escape from Asian crisis contagion from 1997 to 1999. Now it is Asia's turn to help offset the disequilibrium evidenced by the U.S. trade deficits. But there is scant sign that an East Asia so long obsessed with exports, and so reliant on the United States as the engine of global growth, will recognize its international role.

Although several Asian countries have floating exchange rates, these are managed to maintain a close relationship with the dollar, thereby sustaining huge trade surpluses and gains in foreign currency reserves. Asians boast of the size of their reserves, yet fail to see the longer-term dangers of funding U.S. credit excesses. When the day of reckoning arrives, they will lose a lot more than Western and Japanese banks did from funding the Asian credit excesses of the 1990s.

The key to realistic exchange rates is China. No country in the region is going to allow its currency to appreciate significantly unless China does. Although several of the smaller economies, such as Taiwan and Malaysia, are running proportionately larger surpluses, they are too worried about Chinese competition to move first. Most would follow China.

Even Japan has limited reason to resist. Its exports are almost static and it has been losing market share to China and Korea. It too is pressuring China to revalue. But with a trade surplus of around $100 billion, its external position is at least as healthy as that of the euro zone. Japan's problem is weak domestic demand. It would likely cease to resist yen appreciation if its neighbors revalued.

In response to remarks by Alan Greenspan and others, China has recently signaled that it is willing to see a slightly more flexible exchange rate based on a peg to a trade-weighted basket. It has been talking about doing so for years but has never found an appropriate moment to do so. Now, however, a gradual shift to a trade-weighted basket would be too little too late unless also accompanied by a big revaluation.

China hates to be pushed around. But there are good self-interested reasons for a change in currency policy now. First, monetary growth caused by accumulation of reserves has sparked a domestic credit boom and a real estate bubble. That needs reining in. Second, there may now be political kudos to be gained vis-à-vis the United States and Asian neighbors by making a virtue out of necessity, just as China did in 1997. Then it won praise for not devaluing during the Asian crisis; it did not need to, having devalued three years earlier.

China's trade competitiveness is such that it could easily stand a 25-percent revaluation against the dollar. South Korea, Taiwan, Malaysia and Thailand could bear appreciation of at least 20 percent. Exports would suffer a little, but what all East Asian countries have to accept is that the U.S. consumption excesses they are financing and feeding cannot continue.

Currency changes alone will not bring the U.S. deficit down to sustainable levels. But they would be a step toward needed adjustment by East Asian economies which have yet to recognize how vulnerable their U.S. market must now be to disruption, whether caused by a dollar debacle, a return to recession or U.S. protectionism.

Asia's future must lie primarily in domestic demand and exports to non-Western destinations. Revaluations would stimulate domestic demand and regional trade. Asians should be asking themselves whether they need more assets in a country whose level of debts to foreigners casts doubt on its ability to repay them. The more than $1 trillion in U.S. debt that East Asian economies now possess may well prove one of the worst investments ever made. Why throw good money after bad by acquiring more such low yielding bonds in an oversupplied currency?

China should be bold and take the lead. A big yuan revaluation now would spike the protectionists' guns, ease trade tensions and improve national, regional and global financial equilibrium.