Asian finance chiefs yesterday urged an orderly unwinding of global financial imbalances by coordinating regional exchange rate, as leading economists called for more liberal currency regimes.
Thai finance minister Chalongphob Sussangkarn told a gathering in Kyoto that regional leaders should work out how to “bring about a greater convergence of capital markets, while at the same time making sure that particular countries do not suffer too much from the consequences of that convergence.
“This has to do with possibly greater convergence in exchange rate policy,” he said.
His comments came on a day in which South Korea’s finance minister Kwon Okyu had warned that “any abrupt and disorderly unwinding of these imbalances may send a tremendous shock through the global financial markets”, adding that “this remains our central concern”.
Global imbalances “will remain for many years”, Chalongphob warned, citing IMF forecasts. This means that “capital inflows disrupting emerging markets are also likely to continue”, he said. The yen carry trades are meanwhile creating “strain on other economies” including Thailand’s, he said.
“I am not talking about any kind of single currency, but simply greater convergence in direction in the way that countries manage their exchange rate policy.” This would favour countries with more flexible regimes.
Chalongphob’s concerns were echoed by Kwon, who pointed out that South Korea had allowed its currency to appreciate by about 40% against the dollar and 30% against the yen in recent times. Other Asian countries had not made an equal contribution to the unwinding of global balances he added, in an apparent reference to China.
Former US Treasury Secretary Lawrence Summers told Emerging Markets over the weekend that by “operating with imbalances of this magnitude we are taking risks beyond what is prudent”. A programme of adjustment would mean increased savings in the US and demand-led growth in Asia. But as Emerging Markets reported on Saturday, the Harvard academic warned that excessive focus on exchange rate coordination at the expense of currency liberalization could set the stage for a new regional crisis.
New York University economics professor Nouriel Roubini echoed Summers’ views. “Asia has learned the wrong lessons,” he told Emerging Markets last night. “They should stop accumulating reserves and let their currencies appreciate.” Roubini warned that Asia remains overly dependent on Chinese growth which in turn is vulnerable to a hard landing for the US economy, a risk he said was “high.”
“There is too much worry about how to manage foreign exchange reserves when that’s really fighting the last battle. The Chiang Mai agreement really doesn’t matter at all. The problem is a fixed exchange rate system that could unravel if there is a hard landing in the US.”
The Thai minister meanwhile urged Japan to make a greater contribution to solving the problem of financial imbalances and reduce Asia’s dependence on the dollar exchange rate, Chalongphob suggested.
“We know that the dollar is going to weaken, and that therefore [our] currencies are going to appreciate. We need to make a bigger role for regional currencies, and the yen is the prime currency,” he said.
China will make its contribution to preventing financial disruption, promised Wei Benhua, deputy administrator at the State Administration of Foreign Exchange. China will increase the flexibility of its exchange rate, enhance the management of its foreign exchange reserves and balance the inflows and outflow of capital in the country, especially short-term inflows of “speculative” capital, he promised.