海角大神

Currency war? What currency war?

As G20 leaders gather in Seoul Thursday 鈥� their first meeting in Asia 鈥� to seek to rebalance the world economy, some economists here are warning the United States that it should not worry about China's and other regional currencies being too weak; rather, it should worry if they get stronger.

That runs counter to a consensus in Washington that US economic recovery depends heavily on exports that will grow only if Asian importers let their currencies rise, making US goods cheaper.

But if Asian currencies, notably the Chinese RMB, strengthen, as US officials are demanding, the only way Asian exporters will be able to stay competitive will be through 鈥渁 real push to increase productivity鈥� that Western firms will be unable to match, says Martin Schulz, an analyst at the Fujitsu Research Institute in Tokyo.

鈥淭he emerging economies in Asia will take more and more export markets,鈥� predicts Hiromichi Shirakawa, chief economist at Credit Suisse Japan. 鈥淲eaker companies from industrialized nations will be kicked out.鈥�

That bodes ill for President Obama鈥檚 goal of doubling US exports over the next five years, targeting the sort of Asian countries he is currently touring.

Fears are rising in some quarters of a 鈥渃urrency war,鈥� a vortex of 鈥渂eggar thy neighbor鈥� competitive devaluations by governments using exports as an easy engine of economic growth 鈥� and wanting to keep them cheap.

G20 Finance ministers agreed last month to 鈥渞efrain" from such competitive devaluations. But 鈥渃urrency coordination is not easy,鈥� warns Yasunori Sone, a professor of politics at Tokyo鈥檚 Keio University. 鈥淭he G20 can announce" that members will not fight a currency war, "but who will behave?鈥� he wonders, especially at a time when 鈥渆ach country is seeking to defend its own interests.鈥�

A prime example of such a defense, from the Asian viewpoint, is the $600 billion 鈥渜uantitative easing鈥� that US Treasury Secretary Timothy Geithner announced last week in a bid to jump start the US economy. Whatever its effects on the US economy, say economists in Asia, 鈥淨E2鈥� will be bad for this region.

Because cautious US businesses and debt-laden consumers are not borrowing, much of the $600 billion is expected to flow out of the US to countries where higher economic growth rates offer better rates of return.

鈥淔rom now on, we can expect capital inflows to emerging economies, especially in Asia鈥� predicts Masahiro Kawai, head of the Asian Development Bank鈥檚 think tank.

As investors spend the dollars to buy local currencies, those currencies will rise against the dollar. That will make Asian exports more expensive and thus less competitive in international markets.

The only way Asian countries can defend themselves against such an outcome is to impose capital controls to limit the amount of dollars flowing into their economies, or to print money with which to buy dollars, and thus keep their currencies weak.

Capital controls cannot work in the long-term, however, most economists agree. And printing money is inflationary and leads to unstable asset bubbles in sectors such as real estate that carry the risk of financial chaos when they burst.

鈥淚n the end, the US wins the race鈥� to devalue 鈥渂ecause they can print dollars for as long as they want for their own economy,鈥� says Dr. Schulz. The overwhelming majority of world trade is conducted in dollars.

鈥淭he pressure from the US is inevitable,鈥� adds Mr. Kawai. 鈥淔or emerging economies, the best way to respond would be to appreciate their currencies.鈥�

That requires China to strengthen the RMB, though, because Asian countries can only revalue their currencies against the dollar at the same pace as China does, if their exports are not to become less competitive than China鈥檚, Kawai points out.

Emerging Asian economies, he adds, 鈥渁re sandwiched between the US quantitative easing and China鈥檚 quasi-fixed exchange rate鈥� that has risen only 3 percent against the dollar in recent months, far slower than Washington is demanding.

The way out of the conundrum for Asian companies, argues Schulz, is to increase their efficiency in the same manner as Japanese exporting firms have done as they have watched the yen rise in value almost five-fold against the dollar over the past 35 years.

Japanese exporters have been engaged in 鈥渘onstop rationalization and productivity efforts鈥� during that period, says Shirakawa, and they have launched another round in the past two years as the yen has hit new highs. The result, he points out, is that their profits are back to pre-financial crisis levels.

Other Asian exporters will have to do the same if US monetary policy forces them to strengthen their currencies, Shirakawa predicts. 鈥淭he real concern for Japan is that Asian countries will become more productive and increase the quality of their goods to compete with Japan,鈥� he says.

The country with the biggest potential for such a productivity boost, Schulz suggests, is China, and as slow growth in the West stunts Beijing鈥檚 markets there, Chinese exporters are likely to turn to more vibrant markets in their own region.

Already, Schulz says, the effects can be seen in fast-growing Vietnam. Almost all of China鈥檚 exports are machinery 鈥� a sector where it has boosted its share of the market from 10 percent to 50 percent in the past seven years.

鈥淭hat should sound alarm bells for anyone planning to base their exit strategy from the crisis on sales to Asia,鈥� as Obama suggested on the eve of his current Asian tour that he has in mind, says Schulz. 鈥淏ecause China is already there.鈥�