Wednesday, April 13, 2005

Wow- this foreign currency stuff is even more complicated than I'd thought...

I hate to bash the China bashers, but this article from the London Times is the thing to read to understand just how simple-minded some folks are being about this currency stuff.

I quote:

...The dollar and the euro should depreciate against Asian currencies. But how is this to be achieved? At present all Asian governments, with the partial exception of Japan, either peg their currencies officially to the dollar (as in China and Hong Kong) or spend tens of billions of dollars to intervene in the foreign exchanges. This currency intervention is openly justified by Asian politicians as a means of protecting competitiveness and promoting exports. This Asian currency mercantilism represents an export subsidy and trade distortion far bigger than the steel, textile and aircraft disputes, on which the US and European trade ministers waste most of their time.

Why, then, has nothing been done to force the Asians to abandon their currency manipulation? The answer is surprisingly simple. Markets and G7 policymakers have focused on the only two Asian countries that seemed to matter — Japan and China. But on closer inspection, neither Japan nor China, turned out to be appropriate targets.

Japan has not intervened in its currency markets for more than a year. And when Tokyo was artificially holding down the yen, it had a reasonable justification — a cheap yen was need to help to pull the world's second-largest economy out of a 12-year recession, which was doing the global trading system even more harm than the undervalued yen. Now that the Japanese economy is recovering, it could certainly cope with a gradual strengthening of the yen. But Japan’s relatively high labour costs relative to Asian countries such as Korea, Taiwan and Singapore, which are now at a comparable technological level, make the Japanese nervous about being undercut by cheap-currency competitors.

China, meanwhile, has been selling renminbi (RMB) and buying dollars not so much to keep its exports competitive, but to maintain some semblance of stability in its domestic banking system. Moreover, while China has a large surplus with the US and Europe, its overall global trade is not far from balance, because of the enormous deficits it runs against Japan, Korea and Taiwan. On closer inspection, it turns out that much of the value of the goods shipped by China to the US and Europe actually originates in Japan, Korea and Taiwan. Finally, China's wages are so low that even a huge RMB revaluation would be no help to labour-intensive industries in the US and Europe, which China would continue to undercut. The beneficiaries of an RMB revaluation would be factories in Vietnam, Indonesia and the Philippines, not in South Carolina or Spain...

For these reasons, the Chinese and Japanese would almost certainly be willing to participate in a currency revaluation which extended across the whole of Asia but they see no reason why they should take the lead. But if Japan and China will not lead, who can? Two months ago, I suggested a possible answer on this page. The smaller Asian economies, specifically the five newly industrialised “Tiger economies”: Korea, Taiwan, Singapore, Malaysia and Thailand. These are the countries with the world’s biggest trade surpluses relative to GDP. Their industrial structures are now directly competitive with Western countries. Although living standards in Taiwan, Korea and Singapore are comparable to those in the US and Europe, wages are 50 to 70 per cent below Western levels.

Moreover, these countries have been accumulating reserves much faster than either China or Japan. Korea foreign exchange reserves at the end of March stood at $205 billion, and Taiwan's at $247 billion, compared with Japan’s $841 billion and China’s $610 billion. Since the Korean and Taiwanese economies are about one-eighth the size of Japan and China, their reserve accumulation has been far more aggressive — and potentially disruptive to global trading. This is even more true of Malaysia and Singapore.

So far, neither investors nor Western policymakers have paid much attention to these smaller Asian currencies. Most investors have considered buying these currencies to be too risky.

Buy Singapore. Buy Vietnam. Malaysia.

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