Authors: Mathew Joseph and Karan Singh, ICRIER

The sharp fall in US domestic consumption after the financial crisis has to be offset by a rise in net exports. For the US economy to recover then, the dollar must depreciate against the Chinese yuan. This devaluation is proving to be difficult, as the Chinese are resisting a yuan appreciation through massive intervention in the currency markets. The disastrous effects on the Japanese economy of the G7-managed appreciation of the yen in the mid-eighties have made the Chinese wary of a sharp appreciation in the yuan.

But while much focus is put on the US dollar’s depreciation against the yuan, what about the US dollar’s depreciation against the rupee?
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Author: Peter Drysdale

The global financial crisis has brought with it big changes in the international economic system. The response to the crisis has seen the emergence of the G20 as the main locus of international economic governance and a cession of authority from America and the old industrial powers (the G7 economies) to the emerging powers in Asia and elsewhere. The role of the US dollar as the world’s primary international currency is also under question, as the growth of US deficits that are necessary to sustain that role has begun to corrode confidence in the value of the dollar.

As the big new kid on the block, China plays into everyone’s thinking about what to do next. Read the rest of this entry »

Author: Mohamed Ariff, University of Malaya

There is no need to belabour the point that flexible prices play a key role in correcting imbalances, be they between supply and demand for products, or between saving and investment or, for that matter, global imbalances of international capital or trade flows.

This is simply the magic of the price mechanism in text books. Read the rest of this entry »

Author: Max Corden, University of Melbourne

In this changing global order, China’s monetary policy has been the target of persistent criticism. Accepted wisdom conjectured that, if the RMB were allowed to float, it would appreciate substantially more, and this would reduce China’s high current account surplus as well as the US deficit. The RMB was fixed to the US dollar in 1997, and then later unleashed in 2005. Until 2005 China was criticised for fixing the value of the RMB to the US dollar. After that it was criticised for not allowing the RMB to appreciate enough. But the real objection was clearly directed towards the large current account surplus.

What does this mean for the world generally, and East Asia in particular? Read the rest of this entry »

Author: Yiping Huang, ANU

U.S. Treasury Secretary Tim Geithner’s accusation that China was manipulating its currency during his confirmation hearing once again placed China’s exchange rate policy under the spotlight.

Although the White House quickly clarified that it would wait for Treasury’s assessment on the issue in April, the timing of this accusation from a top incoming U.S. economic policymaker could not have been worse.

Not only is China now the only major stabilizing force in the global economy, but the U.S. desperately needs China to support its own efforts in arresting the downward spiral of the financial crisis.

Yet financial market investors do not seem to buy the argument that China will be forced to appreciate its currency. In fact, the non-deliverable forward (NDF) market prices in a 1.3 per cent depreciation of the Chinese yuan against the U.S. dollar (USD) within 12 months.

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Author: Mohamed Ariff, MIER

A common currency for East Asia has been bandied about as a long-term goal, which may take many decades to materialise. No doubt, a common currency would be a great boon to intra-regional movement of goods and services and factors of production. But this proposition would make sense only if East Asian economies are successfully integrated and the thorny issue of national sovereignty can be sidestepped. A currency union for East Asia would represent the highest form of regional integration. It is important that this goal is not lost sight of, although it is extremely difficult to draw a timeline for it. It is best achieved through evolution, not decree.

While the common currency idea is kept on the back-burner, it will be in the interest of East Asian economies, in the interim, to cooperate and coordinate with one another in their exchange rate management.

It will not be difficult to put in place a coordinated basket peg so that there can be flexible, but stable, exchange rates in the region.

This will facilitate increased intra-regional economic transactions and render the region financially resilient.

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Author: Peter Drysdale

Last week the Australian dollar took a tumble and made us all feel just that little bit poorer.

In the 1980s when the Japanese stock market and the yen appeared to some to defy the laws of gravity, I used to say that ‘what goes up must come down’, a trite but wise aphorism to keep in mind when dealing in or commenting on markets in the real world.

So when Yoshio Ishizaka, the stalwart of Toyota international management, asked me where the Oz might be going when he visited the ANU last week, I got to thinking that I should be taking my own advice more seriously after I told him that I thought it still had a bit of strength in it yet.

The Australian dollar is widely perceived in the market as a commodities currency, and that matters in itself. When resource and energy prices are high they take the Oz up too. If the oil price (read the energy price) has peaked, that’s pretty important news for the Australian dollar. It’s not the only news that matters but it is very important news. And that’s one big reason why there are a lot of people out there in the market expecting the Oz to head further south and faster soon.

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Author: Suiwah Leung

With an inflation rate running at 27% pa, current account deficit forecast at 9.2% of GDP, and a widening of the dong/dollar exchange rate between the official and informal markets (at times in excess of 7-8 percent), the Vietnamese government, whose emphasis had traditionally been on stability, is facing its first significant macroeconomic turbulence since opening the economy to international trade and investment almost 20 years ago.

Paradoxically, Vietnam’s success in attracting capital inflows over the last couple of years is behind the current problems. This has revealed some of the limitations of its reform process over the past five years.

The origins of the current macroeconomic problems stem principally from the failure of the State Bank of Vietnam (SBV) to sterilize the surge of capital inflows (which took the form mainly of foreign direct investment and remittances from Vietnamese living abroad) whilst keeping a rigid exchange rate peg in 2007. This left the banking system awash with liquidity, fuelling credit growth of over 50% by the end of last year. Macroeconomic management has been complicated on the one hand, by a ‘young’ banking system inexperienced in pricing risks and, on the other hand, easy access to bank credit on the part of state-owned enterprises (SOEs) eager to expand investments into real estate, financial services, and other non-core activities. Easy credit, coupled with a nascent and poorly regulated stock market, also fuelled a spectacular boom and then bust which is currently dampening investor sentiments.

To make matters worse, 10 days ago, the SBV banned third currency trading by banks (the so-called ‘grey market’) in an effort to curb arbitrage and enforce the official exchange rate. Read the rest of this entry »