What does Asia want from China?

Pana Janviroj, The Nation, Asia News Network, Bangkok

Asians tend not to be very straightforward. They avoid precise questions and exact answers, even on matters of paramount importance -- like money. The debate surrounding the proper exchange regime for the Chinese yuan offers examples of this trait: One would be hard-pressed to recall the last time an Asian leader or central banker made any public remarks on what they think the best system should be.

Yet there is much anxiety over the future of the global financial system, an anxiety that was aggravated by U.S. Federal Reserve Chairman Alan Greenspan's recent statement that "Given the size of the (U.S.) current account deficit, a diminished appetite for adding to dollar balances must occur at some point". Since that bombshell was dropped the U.S. dollar has slid against other currencies.

The war of words over exchange rates has resumed once again, and China's leaders are understandingly frustrated with the international bashing they are receiving for their yuan exchange policy. On the sidelines of the ASEAN Summit in Vientiane, Chinese Premier Wen Jiabao called on the U.S., a pinnacle of balanced finance, to put its house in order rather than accept any criticism of his country.

Asian nations are not going to be drawn into this battle, and not just because it is the "Asian" way to remain aloof. Many Asian countries are grateful for the Chinese government's steadfast commitment to maintaining the exchange rate of the yuan during the Asian financial crisis in 1997 rather than resorting to competitive devaluation.

Last week, a top official at the People's Bank, China's equivalent of a central bank, suggested that the institution would not act without first consulting its partners in Asia. After all, changes in the value of the yuan will affect China's trading partners, among them members of ASEAN, a grouping for which China has gone the extra mile to win both economic and political affiliations.

So Asia's Big Brother has asked what Asia wants from the yuan. How will Asia respond?

The cornerstone of Thailand's relationship with China is stability -- political, economic and social. A stable yuan serves this purpose, particularly since Thai exports go to such diverse markets as the United States, Japan, ASEAN countries, the European Union and China -- the countries that provide the basket of currencies to which the baht is tied. A stable yuan, even if its exchange value is distorted, significantly lowers Thailand's currency risks. China's current, fixed exchange rate system guarantees this stability.

But the trading world is more complicated than that because every country is in some way anchored to the U.S. dollar. The immediate disadvantage for Thailand of the fixed exchange rate system linking the yuan with the U.S. dollar is that this system helps Chinese exports because an undervalued yuan makes Chinese goods cheaper. For Thai goods to remain competitive, the baht has to be somewhat undervalued as well.

As things stand, if market forces were allowed to dictate the value of the yuan, it would become more expensive against other currencies given China's strong economic performance and the country's high foreign reserves.

A yuan re-valued under a proposed peg to a basket of currencies and managed float regime would eliminate much of the bias that now prevails among many Asian currencies.

Would a more volatile yuan end whatever benefits the fixed system provides? Exchange rate volatility could lead to a more volatile Chinese economy

If there is a preference for the stability offered by the fixed exchange regime in the short term -- because stability implies confidence -- the same cannot be said over the long term. This is not a question of what will happen to the U.S. economy, which will dictate the outlook of the American greenback, but the goals to which Asian trading nations and the rest of the world aspire.

With the possible exception of the United States, few countries want to see the world dominated by a single currency or country. The rise of the U.S. as an economic superpower has hinged on the dollar's status as the preferred international currency, which has paved the way for the spectacular growth of U.S. financial institutions and multinationals around the world because they are exposed to less currency risk and have a natural advantage over others in terms of the cost of funds.

The arrival of the euro has given the dollar some competition -- which the Japanese yen has failed to do despite all of Japan's economic successes. But the jury is still out on the European Union's ability to sustain its economy over the long term. If it is to become an alternative international currency, the euro will have to be stronger. The trouble is that this would hurt European exports -- unless European companies are able to become more productive.

In this sense, the idea that the yuan could become another preferred international currency is not far-fetched. There has been talk about Asia becoming a yuan -- not a dollar -- zone. The foundations for such a change could already be found in the regional currency-stabilization pacts that some Asian countries have in place already, as well as the main idea behind Asia bonds -- that Asian countries should keep their savings here and not in U.S. treasury bonds.

Most importantly, the countries within the region are trading more and more with one another, egged on by free-trade arrangements and strategic economic decisions by Asian governments with China in the driver's seat.

It may take another Middle Kingdom to reach that goal, but patience is another of key Asian traits. All things considered, telling Beijing what should be done with the yuan is more difficult than it sounds -- it is not always clear what is politically desirable or what is just not welcome.