Six years after crisis, Asia has both learned and forgotten
Six years after crisis, Asia has both learned and forgotten
Alan Wheatley, Reuters, Singapore
Six years ago, when a tidal wave of currency selling touched off Asia's economic crisis, China won plaudits and contributed to a recovery in regional demand by deciding against a copy-cat devaluation.
Today, in a delicious irony, Asian central bankers are trying to stop their currencies rising, not falling. But one thing has not changed: China's pivotal role in the economic equation.
If Beijing gives in to revaluation pressure and lets its currency off the leash, others would probably follow suit, economists say. But if China digs in its heels, there is a greater risk that its neighbors will cling too long to inappropriate exchange rates, as they did in 1997.
Jim Walker, chief economist of CLSA Emerging Markets in Hong Kong, fears that Thailand and Malaysia among others are already doing just that.
"The signal it sends in terms of policy-making is unfortunately clear in my mind -- that some of the lessons of past mistakes haven't been particularly well-learned," he said.
Of course, the differences between now and then are stark. A sudden flight of footloose capital in 1997 led to cascading devaluations, starting with the Thai baht exactly six years ago today, that sent interest rates soaring and plunged most of Asia into recession.
The repercussions of big inflows of foreign money, in pushing up prices of shares, property and wages, take longer to be felt.
In the case of Thailand, which cut interest rates by half a point last Friday to relieve upward pressure on the baht, Walker said an inflationary bubble may not form for two to three years.
Investment, after all, is still recovering from a post-crisis slump and inflation is close to zero.
But he said Thailand, having sacrificed itself once on the altar of a fixed exchange rate, would be able to counter the build-up of imbalances and so sustain strong growth for longer if it would only let its exchange rate take more of the strain.
"I fear there is a degree of falling back into bad habits," he said. "The unwillingness to see any movement in the exchange rate is sad and potentially keeps misallocating resources."
Adam Le Mesurier, an economist with Goldman Sachs in Singapore, said Thailand's resistance to a rise in the baht made it look as though it had not learned the lessons of clinging tight to a particular exchange rate.
But he said Thailand and other Asian countries have a good excuse for not letting their currencies float free: China.
As the producer with the lowest marginal costs across a growing range of goods, China in effect dictates terms to other manufacturers, Le Mesurier said. "China sets the bar," he said.
The question for Asia's economy, therefore, is when Beijing will let the yuan rise in response to heavy inflows of foreign investment and "hot" money betting on a revaluation.
Officials in Beijing acknowledge they are examining various steps to partially liberalize China's closed capital account that would increase demand for foreign currency and so ease fundamental upward pressure on the yuan, or renminbi.
Political pressure is also building on China to widen the yuan's tight nine-year-old band of 8.2760 to 8.2800 per dollar.
Echoing recent comments from Washington and Tokyo, South Korea's top foreign exchange official said on Wednesday that the Chinese currency should better reflect market forces.
"As an economic leader in Asia, China needs to expand its yuan trading band gradually. As I understand, China is now considering doing so," Kwon Tae-shin, deputy finance minister for international affairs, told Reuters in Seoul.
The United States, Japan and South Korea have a self-interest in a stronger yuan: they want to help their own exporters.
But there is a potent international case for the yuan -- and hence most other Asian currencies -- to rise: the need to reduce America's gaping current account deficit for the sake of global financial stability.
In its annual report this week, the Bank for International Settlements criticized some unnamed Asian countries for opposing a rise in their currencies that would cut their current account surpluses and, by extension, help shrink the U.S. deficit.
"Such resistance to appreciation in Asia implies that the burden of exchange rate adjustment is likely to fall disproportionately on those currencies that are truly floating, like the euro," the Basel, Switzerland-based BIS said.
How to share the burden of currency adjustment is likely to be a talking point at a meeting of Asian and European finance ministers this weekend on the Indonesian resort island of Bali.
But not all economists agree with the BIS's logic. Andy Xie of Morgan Stanley in Hong Kong said in a report that China could simply compensate for a revaluation by reducing nominal wages.
Where economists do agree is that China will make adjustments gradually, in its own interest, at a time of its choosing.
Until China cleans up its banks and strengthens its financial markets, casting the yuan loose would run the risk of sowing the same instability that devastated much of Asia six years ago because hot money inflows can quickly become hot money outflows.
"The Asian crisis has taught China's leaders the valuable lesson that, for an economy with weak domestic fundamentals, sudden capital account liberalization leaves it vulnerable to capital exodus," said Rob Subbaraman of Lehman Brothers in Tokyo.