East Asians need a deal on exchange rates
 
Philip Bowring IHT
Wednesday, December 11, 2002
Currency values
 
HONG KONG The current source of greatest tension in East Asia is not North Korean weapons or El Qaada plots. It is currency values. The arrival of a new U.S. Treasury secretary could bring these to a head - but could also provide for their resolution in the same way that the 1985 Plaza accord was made possible by Donald Regan's replacement by James Baker.
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Plaza led to more rational exchange rates, which reduced trade tensions and shifted the burden of global stimulus away from the United States.
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America's main Asian trading partners, China and Japan, are at loggerheads over their exchange rates against the dollar. This is having a knock-on effect on other Asian currencies such as the Korean won and the Taiwan dollar, which are fundamentally strong but want to avoid appreciating against the yen because they compete directly with Japanese exports, or against the yuan because that will speed the exodus of industries to low-cost China.
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Japanese officials have been trying hard to talk down the value of the yen even though Japan continues to have a huge current account surplus. It needs depreciation more for domestic policy reasons than to enhance its competitiveness. However, the Japanese are blaming China for what they see as deliberate currency undervaluation which is undermining their own exports and those of Asian neighbors. China in response has not only rejected the idea of revaluation but has backed away from the long-heralded move toward a more flexible currency policy that would have linked the yuan to a basket of major currencies rather than just to the dollar.
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The war of words was well under way even before the personnel changes in Washington. The market now seems to expect that the United States will run a looser fiscal policy that could weaken the dollar, even assuming that the new Treasury secretary, John Snow does not encourage a weaker dollar to stimulate U.S. industry and improve the pricing power of U.S. corporations.
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The dollar has already lurched lower, in the process making the China-Japan face-off more intense. The Japanese have seen their attempts to weaken the yen confounded. China is benefiting from its peg to a lower dollar. It is retaining its competitiveness in the American market while Japan, Europe and much of Asia see theirs being harmed.
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A major further fall in the dollar may well be necessary if the U.S. trade deficit is to be brought down to a sustainable level. That will cause pain for all exporting countries. But unless exchange rate relationships in Asia undergo another shift, the pain will be especially severe for Japan, and also for South Korea and Taiwan, and least for the country which now has the greatest absolute and relative trade imbalance with the United States - China. Almost all currencies in East Asia could withstand substantial appreciation against the dollar. Foreign debts are well down, and current account surpluses remain strong. However, no one wants to surrender the supposed benefits of weak currency, given the importance they all attach to exports and the fact that inflation everywhere is low. Southeast Asia has long been feeling the pinch from China's gains in competitiveness and its attractions for investors. The floating rate currency regimes adopted by these countries since the Asian crisis have so far been beneficial. But they will be viewed differently if the region's currencies appreciate with the euro and the yen while China stays pegged to a weakening dollar. China has another problem. Its trade balance could easily withstand a 15 to 20 percent appreciation of the yuan. However, goods prices have been falling despite strong growth. A revaluation would further depress prices and make the condition of state enterprises, and hence the banking system, worse.
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In short, in Asia domestic needs are running counter to the need to rebalance international trade through relative exchange rates. If the dollar stabilizes at present levels against euro and yen, the verbal spats may die down. But if the dollar makes a further downward lurch, expect sparks to fly in Asia and a new Plaza to lead to realignments within Asia not just between the dollar and the euro and the yen. International Herald Tribune

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