East Asian imbalances go beyond China

HONG KONG So many meetings, so little getting to the point. The U.S. Treasury secretary, John Snow, has been talking to China, and the finance ministers and central bankers of the world's 20 leading countries, the G-20, have been meeting near Beijing, with the inevitable fixation on the yuan. But the really deep, fundamental and unsustainable global imbalance is not between China and the United States but between East Asia and the rest of the world (oil exporters excepted). Fixing that, however, is made more difficult by the reluctance of the old rich to give dynamic Asian G-20 members a bigger say in global institutions. Snow has been sensible enough to talk in broad terms about yuan flexibility and not issue threats or specific revaluation targets. But by taking his message to Beijing and not to Tokyo, Seoul, Taipei, Kuala Lumpur and Singapore, he has missed the real issue. In the process, he has made China more defensive and has failed to use pressure on these other capitals as a means of levering Beijing as well. Despite the steep rise in prices of oil and most industrial commodities over the past 18 months, countries of East Asia continue to record big current account surpluses. Those of Japan, South Korea and Taiwan have been reduced by their dependence on imported energy. But they are still huge. Only one significant country in this region now has a current account deficit - Thailand. Even its deficit is modest and now declining. Yet the past few months have seen most of these currencies decline against the dollar despite the appreciation of the yuan when it was nominally floated in July. The Taiwan dollar has actually fallen against its level of a year ago, while the yen is back to that level, as is the Singapore dollar. And let's not fool ourselves. East Asian currencies would be a lot higher if the governments so willed. They all intervene when there is upward market pressure, but none when the market is pushing them down. Measure the decline of the currencies of thriving East Asia with the relative strength since 2002 of those of near-stagnant Europe and one gets a better picture of how market forces have been skewed by East Asian currency intervention and accumulation of foreign exchange reserves. For all of East Asia, not just China, export growth, not domestic demand, is underpinning economic growth - and the global imbalances. Stimulating domestic demand is easier said than done, given strong household savings instincts and regional demographic profiles. But there can be no doubt that artificially weak currencies play an important role in suppressing consumer demand as well as stimulating exports. They have also added to worries about imported inflation and hence to more restrictive economic policies. Meanwhile all governments ignore the cost of intervention to their central banks' balance sheets. China now recognizes the importance of increasing consumption. The governor of the People's Bank, Zhou Xiaochuan, has admitted that the trade surplus is causing friction and that the best way to reduce it is to bolster consumption. Snow emphasized the role that an improved financial sector can play in stimulating consumption. But this is marginal unless China is seen as part of an East Asia confronting similar issues but unwilling to face up to the role of currency values in stimulating domestic demand. The United States focuses on its own huge deficit with China because it is a political issue in Washington. But the economic reality is that China's exports are to a significant extent a reflection of the export success of companies from Taiwan, Japan and South Korea. In many cases, particularly electronics, the value added in China of Chinese exports is no greater than that of the country supplying the components which are assembled in China, and less than that of the brand owner. The yuan is just a part of a much bigger imbalance problem. Unless that is grasped, the world will continue to drift toward a crisis of imbalances. We have not yet had a crisis partly because international liquidity as measured by reserve assets has grown by 18 percent over the past 12 months. But that simply tells us that time is being bought at the cost of renewed inflation. Persuading East Asian countries to act responsibly in the broader global interest will be tough unless they are given the power in international decision-making that they deserve.