South Korea joins the bandwagon, stepping up pressure on China

South Korea joins the bandwagon, stepping up pressure on China over currency

Agence France-Presse Nusa Dua, Indonesia

South Korea has stepped up pressure on China to unleash its currency and make way for a revaluation to better reflect market forces and help reduce the U.S. current account deficit.

The move would also reduce the vulnerability of Korea's won to speculative trading, South Korean Finance Minister and Deputy Prime Minister Kim Jin-Pyo said in an interview on the sidelines of the fifth Asia Europe Meeting (ASEM) of finance ministers here.

"China's role in the world economy is rapidly increasing. For China to sustain its strong growth it is imperative to participate naturally in the global marketplace," Kim said.

"I think it's in the interests of China to expand the band in which its currency is influenced by supply and demand in the marketplace. I believe China is preparing such an expansion."

His comments follow similar recent statements from Washington and Tokyo.

At a press conference after the meeting ended, Japanese Finance Minister Masajuro Shiokawa said it is "inevitable" that China will have to open its currency market to the world marketplace as its economy becomes more globalized.

Expanding the tight nine-year band of 8.276-8.28 per dollar would allow the yuan to strengthen on the back of strong foreign investment inflows and speculation of a revaluation.

The benefits would be also be felt well beyond China's borders, Kim said. Allowing the yuan to rise would reduce China's current account surplus and help plug America's gaping trade deficit.

It would also help reduce the risk to the world economy posed by countries that are reluctant to let market forces dictate the value of their currencies, he said.

"If China, the U.S. and Japan artificially try to bring about a change in their exchange rate or monetary policy, there is a high risk that speculative forces will form in small, open economies" such as Korea, he said.

"This poses a risk to the stability of the world economy."

South Korea has recovered strongly from the 1997-98 financial crisis, which was partly precipitated by some countries' reluctance to let their currencies float free.

But other Asian countries, still smarting from the effects of the sudden capital exodus and resulting devaluations, are less enthusiastic about the idea of China freeing up its yuan controls.

"It would be good for the global economy if China opens itself up to more market mechanisms, but it must not be done in a way that shocks the system," said Philippine Finance Minister Jose Isidro Camacho in an interview.

"Abrupt changes in currencies such as the renminbi could hurt more than help by causing unpredictable instability in all economies."

The Philippines, which is less dependent on exports than some of its neighbors and more concerned with servicing its hefty debts, opposes further falls in the U.S. dollar.

"We support keeping the level of Asian currencies where they are," said Camacho.

ASEM's Asian membership comprises Brunei, China, Indonesia, Japan, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam, while the 15 European Union members make up the other side.

Kim said the European delegates accepted that, to an extent, the dollar's fall -- and by extension the euro's rise -- is a "necessary and desirable" change to restore the imbalance in US trade.

South Korea's main concern is that Washington will intervene in the money market to expedite this process.

"For a sound recovery of the world economy and a sound expansion of world trade, the G7 (Group of Seven major economies) countries need to agree an appropriate level to correct the value of international currencies," Kim said.

"A sudden or arbitrary change in the dollar value would be fraught with risk" because it would prompt other economies such as Japan to intervene to curb the rise in their own currencies, he said.