Where Are Taiwan's "18 Responses" to the Global Currency War?
China Times editorial (Taipei, Taiwan, ROC)
October 14, 2010
For the past two weeks, the most striking aspect of international financial markets has been the struggle between two superpowers, the Chinese Mainland and the US, over the upward revaluation of the renminbi. Emerging markets have joined hands opposing an upward revaluation of the RMB. The current situation is more complex than in the past. The USD, the RMB, the JY, and various emerging market currencies have intersected. The major powers have mutual interests, both positive and negative.
Following the 2008 financial tsunami, the advanced economies of Europe and North America fell into sharp recession. Beijing injected four trillion RMB into its economy to increase domestic demand. It hoped to gradually convert its single-engine economy, driven by exports, into a twin-engine economy, driven by both exports and domestic demand. Because of this, many countries hope Mainland China will be the force behind a global economic turnaround. Washington and Beijing joined hands to fight the financial tsunami. Their relationship has become extremely close. Hence the expression, "G2." The US Currency Report has not listed Beijing as a "currency manipulator state."
This year however, the US has frequently touched sensitive nerves during its Western Pacific military exercises. The US economy has shown no improvement. Unemployment remains close to 10 percent. The US government is under tremendous pressure. At this point, claiming that the yuan has been deliberately undervalued and is "taking away American jobs," is an easy way to find a scapegoat. The value of the RMB rose dramatically after being floated, establishing new highs. Nevertheless the US government demands that the RMB be revalued upward even further. The Chinese Mainland, out of national pride or economic realism, balks at revaluing the RMB as much as the US demands. In fact the tug of war over the revaluation of the RMB is not purely a monetary and economic issue. It is part of a "total war" between two major powers.
Meanwhile, the Japanese Yen has been subjected to a huge upward revaluation, The exchange rate is approaching 80 JY to the USD. Japanese companies must bear the brunt of this revaluation. This has forced the Japanese government to intervene with an injection of several trillion yen into its economy. But the Japanese government's unilateral intervention will not necessarily inspire other major industrial nations to ride to the rescue. Other countries are happy to see the JY appreciate. As a result, the effectiveness of the Japanese government's intervention may be limited. The appreciation of the JY has two causes. The underlying cause is spread trading funds covering the JY following the financial tsunami. The proximate cause is the Mainland Chinese government, which has been buying vast quantities of Japanese government bonds. The two Asian powers are arguing over whether Mainland China is deliberately attempting to force an upward revaluation of the JY.
Following the financial tsunami, emerging market countries must confront the world's central banks. First they injected trillions of dollars to the market. Then they implemented a near-zero interest rate policy. They made unlimited funds available with a "quantitative easing" policy, flooding the market knee deep in capital. High interest funds looked to emerging markets, which were the first to recover in the wake of the financial tsunami. Several trillions of dollars in hot money from all over the world poured into these emerging markets. Naturally these national currencies appreciated. But these countries had just climbed out of a recession. Domestic demand was insufficient. They needed to strengthen their exports. They were afraid currency appreciation would impact their export competitiveness. Needless to say, they all did their best to stop any upward revaluation.
As a result, the Brazilian Finance Minister publicly spoke of the race to devalue among nations, Japan 's forceful intervention in the exchange rate, the Central Bank on Taiwan pegging its exchange rates to those of its main competitor Korea, strongly defending the 31 NT per USD level. The interest some emerging market countries showed in the so-called "hot money tax" was a product of this situation. The International Monetary Fund has issued repeated warnings. It is concerned that if governments use monetary policy as a weapon to solve domestic economic problems, they could seriously jeopardize any global economic recovery.
The US wants to compel an upward revaluation of the RMB. The situation is similar to the 1985 Plaza Accord, which attempted to compel an upward revaluation of the JY. The United States was suffering from a weak domestic economy. Japan was enjoying a huge trade surplus with the United States. The United States, along with other major industrial countries, intervened. Japan played along. Today's situation differs. The Chinese Mainland does not need to play along with the United States the way Japan did. The Chinese Mainland has links with all major industrial nations, who may not be able to reach a consensus. Therefore the situation is more complex and unpredictable than in the past.
The most important point for future reference, is of course, the exchange rate report published by the United States. Will it accuse Mainland China of being a currency manipulator? Will it impose punitive tariffs on exports from Mainland China? If it comes to this, then a global trade war could erupt. All manner of protectionist policies and puniitve measures against competitor nations may be imposed. The pace of global economic recovery will inevitably be reversed. History has taught us a series of painful lessons. Unless all nations lose their senses, the probability of this happening is low. But a tug of war and shocks to the system during the consultation process are inevitable. The Republic of China government may not have much leverage in this rivalry among international powers. But it must protect itself. It must maximize the good, and minimize the bad. The government must have "18 Responses," not just the one in which the Central Bank defends to the death the 31 NT per USD exchange rate.