If M. Ariff is correct, and Malaysia and Thailand find that they have no choice but to peg their currencies to the RMB in order not to be disadvantaged as the USD falls, then the race to the bottom is on in East Asia. I doubt it comes to that, but in the event that it does, it will be the end of East Asia's chances of financial regionalism. A switch to RMD would be the biggest story in international political economy since the USD took over from the pound Stirling as the world reserve currency.
Pegging to the dollar is simply a "begger-thy-neighbour" policy. It is important to note that these distortions will not just damage the US, but also each countries' regional neighbours. Thus, the pain will be felt door in Indonesia if Malaysia pegs to the RMB, in the form of lost export market share and therefore higher unemployment. If Malaysia or Thailand were to peg to the RMB, it could potentially trigger others to do likewise in order to avoid the pain.
Pegging to the USD is simply opting out of the region, and pegging to the RMB would have similar effect. If more economies start to proxy dollarize via a peg to the RMB, exchange risks would come down and exports would go up. East Asian central banks would lose control of the interest rate lever and the US would start piling on more debt.
Due to this, gone would be the incentive to see financial risks and burdens be distributed throughout the region on market basis, as each country sets about politically manipulating its exposure. Gone too then would be the precious trust which underlies the international economy.
China peg's is simply no longer a domestic concern - as if it ever were. The solution is not for others to peg to China but for China to either move to a basket of currencies that actually includes more than the USD (it current "basket" adopted in 2005 is really all USD) such as the Yen, Euro and etc or to go with a pure float.
To realise the insanity of the situation imagine what would happen if the US started to peg to the RMB as its sovereign right?
Showing posts with label ACU. Show all posts
Showing posts with label ACU. Show all posts
Friday, 19 February 2010
Thursday, 3 September 2009
Currency Diplomacy, now and then.
Time is like a river, and history repeats. Japan’s ‘novel’ idea of a currency union for Asia, is modelled partly on the experience of the Euro. But in fact a closer match for Asia’s current political-economy might well be Europe of 19th Century, rather than the 20th. Even then, in 1865, the idea of common regional currency was being debated in Europe, and its outcome is instructive for today’s currency politics in Asia.
In mid-1800s, Napoleon III of France launched a project to tie other European currencies to the Franc in what was called the Latin Monetary Union (LMU). At this time, France fixed the Franc to contain a certain quantity of silver (4.5 grams) and proposed that other currencies adopt its standard. Doing so, the French argued, would facilitate international trade by removing risks and transaction costs associated with exchanging one currency for another, or indeed due to movements within the bimetallic exchange rate. Harmonising the currencies of Europe was rational, scientific (metric!) and civilised argued the French. Notwithstanding the limits of the eventual agreement, (private persons/ Banks were not obliged to accept foreign minted but LMU-consistent coinage), the LMU did gather significant support – indeed lasting until the 1920s.
The French were particularly keen for the British to sign onto the scheme. And indeed, although Britain was on the gold standard rather than bimetallism, a minimal adjustment of the quantity of gold within the pound and a (much needed) technical reform (decimalising the currency) and the British could have joined the LMU, if they had wanted to, relatively easily. But here politics got in the way of economics. Britain had little love or trust for the revolutionary French, whatever the potential benefits. In fact, the British believed the LMU was a rouse, a part of the French master strategy to secure its economic hegemony in Europe and to wrestle away from London its status as a financial centre. With Britain refusing to sign on, the LMU was confined to France’s poorer, southern neighbours for whom the marginal cost of aligning their currencies to the French mint’s standards was perceived worthwhile in order to “facilitate international trade, import a better internal currency, acquire monetary credibility and gain access to international [French] financial markets”, see Einaudi.
Now, from Napoleon III’s Paris, we leap forward in time and space, roughly 150 years and more precisely 9738km, to Tokyo in the present. Here we find that, over the years since the Asian Financial Crisis, some within Japan have argued for a regional exchange rate mechanism for Asia.
While not identical to the LMU, the diplomacy surrounding the Asian Monetary Union (AMU) as it might be called does share some similar features. In terms of style, Japan’s Ministry of Finance has argued that it is rational for the nations of Asia to adopt a common currency, and a veritable “.pdf” tidal wave of scientific/economic research has been presented to support this vision - much the same way France postured in the mid-1800s minus the modern software. In terms of membership, like the LMU, the most receptive audience is the smaller, poorer nations to the south – in this case ASEAN states rather than Belgium et al.[1] And like the LMU, at least one major regional power is opposed to the scheme. China.
China has little love or trust for the Japanese, regardless of the possible benefits of a common Asian coin. Indeed, China has dismissed some of the proposed weightings for a future Pan-Asian currency which have been raised in various East Asian multilateral fora. This is because, in the first instance, China believes that the whole scheme is a rouse designed to ensure Japan’s economic hegemony and project its position as a financial centre for Asia; and, in the second instance, that as a matter of national pride the Yuan ought to be the most important currency in any “designer” Asian money. Taking its cue from Japan, China has starting arguing that others, including the ASEAN states should place greater weight on the Chinese Renminbi (RMB). Indeed, already smaller states close to the border of China are using the RMB in settling their international (and indeed some internal) trade. Of course, these are the same target states for Japan’s ‘scientific’ common currency proposals.
Of course, Japan is not France, China is not the UK and the AMU proposal is not the LMU. But if a lesson can be drawn from history it is that without a level of trust and cooperation among the major powers of the region, currency coordination efforts are doomed to become a competitive and futile exercise. Much like France of the 19th Century, Japan has not presented a unified vision. Moreover, Japan has copied some of France’s mistakes, linking membership in the proposed AMU to the political alignment of prospective member countries.[2] It is no surprise then that the plan is viewed suspiciously by Beijing. As Balassa suggests, if Japan and China are not even able to conclude a FTA between themselves, then cooperation in the creation of a regional currency is beyond them.[3]
[1] Italy, Switzerland, Spain, Greece, Romania, Austria-Hungary, Bulgaria, Venezuela, Serbia, Montenegro, San Marino and later the Papal States, although the Papal States were later thrown out due to the practice of debasing their coins.
[2] Smaller German not yet part of Bismark’s second Reich looked to the LMU as a way of gaining French support for the independence. Taiwan and Hong Kong are playing similar games, as are countries such as Laos in the Mekong Delta.
[3] Bela Balassa, The Theory of Economic Integration (Homewood: Irwin, 1961).
In mid-1800s, Napoleon III of France launched a project to tie other European currencies to the Franc in what was called the Latin Monetary Union (LMU). At this time, France fixed the Franc to contain a certain quantity of silver (4.5 grams) and proposed that other currencies adopt its standard. Doing so, the French argued, would facilitate international trade by removing risks and transaction costs associated with exchanging one currency for another, or indeed due to movements within the bimetallic exchange rate. Harmonising the currencies of Europe was rational, scientific (metric!) and civilised argued the French. Notwithstanding the limits of the eventual agreement, (private persons/ Banks were not obliged to accept foreign minted but LMU-consistent coinage), the LMU did gather significant support – indeed lasting until the 1920s.
The French were particularly keen for the British to sign onto the scheme. And indeed, although Britain was on the gold standard rather than bimetallism, a minimal adjustment of the quantity of gold within the pound and a (much needed) technical reform (decimalising the currency) and the British could have joined the LMU, if they had wanted to, relatively easily. But here politics got in the way of economics. Britain had little love or trust for the revolutionary French, whatever the potential benefits. In fact, the British believed the LMU was a rouse, a part of the French master strategy to secure its economic hegemony in Europe and to wrestle away from London its status as a financial centre. With Britain refusing to sign on, the LMU was confined to France’s poorer, southern neighbours for whom the marginal cost of aligning their currencies to the French mint’s standards was perceived worthwhile in order to “facilitate international trade, import a better internal currency, acquire monetary credibility and gain access to international [French] financial markets”, see Einaudi.
Now, from Napoleon III’s Paris, we leap forward in time and space, roughly 150 years and more precisely 9738km, to Tokyo in the present. Here we find that, over the years since the Asian Financial Crisis, some within Japan have argued for a regional exchange rate mechanism for Asia.
While not identical to the LMU, the diplomacy surrounding the Asian Monetary Union (AMU) as it might be called does share some similar features. In terms of style, Japan’s Ministry of Finance has argued that it is rational for the nations of Asia to adopt a common currency, and a veritable “.pdf” tidal wave of scientific/economic research has been presented to support this vision - much the same way France postured in the mid-1800s minus the modern software. In terms of membership, like the LMU, the most receptive audience is the smaller, poorer nations to the south – in this case ASEAN states rather than Belgium et al.[1] And like the LMU, at least one major regional power is opposed to the scheme. China.
China has little love or trust for the Japanese, regardless of the possible benefits of a common Asian coin. Indeed, China has dismissed some of the proposed weightings for a future Pan-Asian currency which have been raised in various East Asian multilateral fora. This is because, in the first instance, China believes that the whole scheme is a rouse designed to ensure Japan’s economic hegemony and project its position as a financial centre for Asia; and, in the second instance, that as a matter of national pride the Yuan ought to be the most important currency in any “designer” Asian money. Taking its cue from Japan, China has starting arguing that others, including the ASEAN states should place greater weight on the Chinese Renminbi (RMB). Indeed, already smaller states close to the border of China are using the RMB in settling their international (and indeed some internal) trade. Of course, these are the same target states for Japan’s ‘scientific’ common currency proposals.
Of course, Japan is not France, China is not the UK and the AMU proposal is not the LMU. But if a lesson can be drawn from history it is that without a level of trust and cooperation among the major powers of the region, currency coordination efforts are doomed to become a competitive and futile exercise. Much like France of the 19th Century, Japan has not presented a unified vision. Moreover, Japan has copied some of France’s mistakes, linking membership in the proposed AMU to the political alignment of prospective member countries.[2] It is no surprise then that the plan is viewed suspiciously by Beijing. As Balassa suggests, if Japan and China are not even able to conclude a FTA between themselves, then cooperation in the creation of a regional currency is beyond them.[3]
[1] Italy, Switzerland, Spain, Greece, Romania, Austria-Hungary, Bulgaria, Venezuela, Serbia, Montenegro, San Marino and later the Papal States, although the Papal States were later thrown out due to the practice of debasing their coins.
[2] Smaller German not yet part of Bismark’s second Reich looked to the LMU as a way of gaining French support for the independence. Taiwan and Hong Kong are playing similar games, as are countries such as Laos in the Mekong Delta.
[3] Bela Balassa, The Theory of Economic Integration (Homewood: Irwin, 1961).
Tuesday, 11 August 2009
Japan, the DJP and Regional Financial Arrangements; a preliminary view.
In recent days both the Liberal-Democratic Party (LDP) and the Democratic Party of Japan (DPJ), in addition to trading barbs, have released their respective ‘manifestos’, or policy platforms. Unsurprisingly, the focus in these documents is on domestic political matters almost exclusively with the pension system again taking centre stage.
Despite the preoccupation with internal affairs, Japan will not be able to shut out events in the outside world. The global financial crisis will propel the new government headlong into international affairs, ready or not.
It is increasingly likely that the DPJ will win this election. What are the DPJ’s views on Japan’s role in the international economy?
A central question is whether Japan will throw its weight behind the effort to de-throne the US dollar’s global role. It is worth remembering that in 1999, in the aftermath of the Asian financial crisis, the then PM Obuchi proposed ‘yen internationalisation’ as a means of achieving exactly this. Japan’s intentions are still important because unlike China - the current ‘leader’ (or at least the most vocal member) of the putative movement to replace the dollar, the Japanese yen has the greater ability to replace to some extent the dollar’s role, at least within East Asia.
The first point is that the DPJ has no declared policy on the role of the yen. At least not yet. But it has ideas, and ideas which in time might morph into policy. Indeed, Yukio Hatoyama, the DPJ’s leader and potential Prime Minister, has commented about currency coordination in East Asia in the Diet. In 2005, Hatoyama said in a Diet session focused on constitutional reform, that ‘it is important now to have a discussion about how to include in our constitution a clause enabling us, Japan, to give up a portion of our sovereignty to regional level governance, like the members of the EU did with the Euro. I believe that such an East Asian Community is necessary.’ While not a comment on ‘yen internationalisation’ per se, these comments suggest that the idea of common currency in Asia (the effect of which would be to displace or reduce the role of the USD) has attraction for him personally.
Others within the DPJ have been more specific. Nakagawa Masaharu, the Nekusuto (shadow) treasurer, hit all the buttons in an interview with Bloomberg in early July, in one sentence alone calling for yen internationalisation, IMF-SDR denominated bonds, and the US to issue some of its bonds in yen (aka Samurai bonds). Taken together, these ideas if they became policy would move Japan from its current position supporting the USD’s role as key currency, to adding Japan’s not inconsiderable weight to those seeking to unseat the USD (or at least its privilege in debt denomination).
Hatoyama’s belief is that the question of the USD’s role (and yen’s role in any new regional financial architecture) is ultimately a political question, as closely tied to the rise of China as to the perceived excesses of the US. Hatoyama recently published a piece called ‘My political philosophy’ in this month’s Voice, a leading news magazine in which he writes, ‘The realisation of regional currency integration (an Asian Common Currency) ought to be our goal, however this ought to occur in the context of building a permanent East Asian security frame-work’. That is a fairly unequivocal statement of support for the Asian Currency Unit (ACU) idea – an idea which has been voiced in Japanese Ministry of Finance and related research bodies, and by influential people such as former PM Nakasone. Taken together with Hatoyama’s earlier statements in the same article about American economic hegemony failing, we can conclude that he is (at the moment, as the leader of the non-governing party) sympathetic to idea of reforming the current financial system in which the USD is the key currency. Hatoyama’s ideas about an Asian Common Currency (presumably including China) were married to the belief that the move (effectively toward China) should be taken in tandem with the development (and progress towards) a regional security framework.
It is still early days, but what is apparent is that the DPJ and Hatayama are more pre-disposed than the LDP toward reaching a new understanding with China. The emphasis on China is clearly signposted in the DPJ manifesto, as is the interest in cooperating with China in regional architecture building, including in the financial arena.
Neither Hatoyama nor Nakagawa have a background in international finance, (graduates of engineering and international politics respectively), so once the DPJ is in government and as the trade offs of moving beyond the dollar become clearer there remains every possibility that the DPJ will back away from taking on the USD, at least initially. But if there were signs already the Japan was tipping away from the US-led Pacific, open regional order towards a more exclusive economic arrangement with its partners in East Asia, the results of this election could accelerate those trends.
Despite the preoccupation with internal affairs, Japan will not be able to shut out events in the outside world. The global financial crisis will propel the new government headlong into international affairs, ready or not.
It is increasingly likely that the DPJ will win this election. What are the DPJ’s views on Japan’s role in the international economy?
A central question is whether Japan will throw its weight behind the effort to de-throne the US dollar’s global role. It is worth remembering that in 1999, in the aftermath of the Asian financial crisis, the then PM Obuchi proposed ‘yen internationalisation’ as a means of achieving exactly this. Japan’s intentions are still important because unlike China - the current ‘leader’ (or at least the most vocal member) of the putative movement to replace the dollar, the Japanese yen has the greater ability to replace to some extent the dollar’s role, at least within East Asia.
The first point is that the DPJ has no declared policy on the role of the yen. At least not yet. But it has ideas, and ideas which in time might morph into policy. Indeed, Yukio Hatoyama, the DPJ’s leader and potential Prime Minister, has commented about currency coordination in East Asia in the Diet. In 2005, Hatoyama said in a Diet session focused on constitutional reform, that ‘it is important now to have a discussion about how to include in our constitution a clause enabling us, Japan, to give up a portion of our sovereignty to regional level governance, like the members of the EU did with the Euro. I believe that such an East Asian Community is necessary.’ While not a comment on ‘yen internationalisation’ per se, these comments suggest that the idea of common currency in Asia (the effect of which would be to displace or reduce the role of the USD) has attraction for him personally.
Others within the DPJ have been more specific. Nakagawa Masaharu, the Nekusuto (shadow) treasurer, hit all the buttons in an interview with Bloomberg in early July, in one sentence alone calling for yen internationalisation, IMF-SDR denominated bonds, and the US to issue some of its bonds in yen (aka Samurai bonds). Taken together, these ideas if they became policy would move Japan from its current position supporting the USD’s role as key currency, to adding Japan’s not inconsiderable weight to those seeking to unseat the USD (or at least its privilege in debt denomination).
Hatoyama’s belief is that the question of the USD’s role (and yen’s role in any new regional financial architecture) is ultimately a political question, as closely tied to the rise of China as to the perceived excesses of the US. Hatoyama recently published a piece called ‘My political philosophy’ in this month’s Voice, a leading news magazine in which he writes, ‘The realisation of regional currency integration (an Asian Common Currency) ought to be our goal, however this ought to occur in the context of building a permanent East Asian security frame-work’. That is a fairly unequivocal statement of support for the Asian Currency Unit (ACU) idea – an idea which has been voiced in Japanese Ministry of Finance and related research bodies, and by influential people such as former PM Nakasone. Taken together with Hatoyama’s earlier statements in the same article about American economic hegemony failing, we can conclude that he is (at the moment, as the leader of the non-governing party) sympathetic to idea of reforming the current financial system in which the USD is the key currency. Hatoyama’s ideas about an Asian Common Currency (presumably including China) were married to the belief that the move (effectively toward China) should be taken in tandem with the development (and progress towards) a regional security framework.
It is still early days, but what is apparent is that the DPJ and Hatayama are more pre-disposed than the LDP toward reaching a new understanding with China. The emphasis on China is clearly signposted in the DPJ manifesto, as is the interest in cooperating with China in regional architecture building, including in the financial arena.
Neither Hatoyama nor Nakagawa have a background in international finance, (graduates of engineering and international politics respectively), so once the DPJ is in government and as the trade offs of moving beyond the dollar become clearer there remains every possibility that the DPJ will back away from taking on the USD, at least initially. But if there were signs already the Japan was tipping away from the US-led Pacific, open regional order towards a more exclusive economic arrangement with its partners in East Asia, the results of this election could accelerate those trends.
Wednesday, 15 July 2009
Internationalisation of the Yen Yuan
As Mark Thirwell notes here, China is on the long march to increase the internationalisation of the Yuan.
What is not usually raised in the discussion of China's (high profile) criticism of the USD is that China is not the first Asian giant to propose that the world, or at least the region, move away from the dollar as the intermediate currency of choice. Nearly a decade before Japan was calling, quietly, for something similar. But whereas Japan was, and still is, dependent on the US for its security and status in the international order, China is not. Or at least, China, unlike Japan, seems to believe that it is a great power in its own right. More on that in subsequent posts.
In fact China is really riding on Japan's coat tails with regard to the whole internationalisation of the Yuan idea. Since the early 1990s, Japan started talking about the internationalisation of the yen, with the goal of reducing the region's reliance on the dollar. Japan has already done all the research necessary to argue persuasively for the need to move away from the dollar. But unfortunately for Japan, while it has made its case that the dollar should go "down", it has not persuaded the region that the Yen should go "up". Infact, since the Asian Financial Crisis of 1997, holdings of the yen have in fact fallen in the central banks of the region.
Unsurprisingly, China's moves have caused some consternation among Japan monetary policy makers as yet another example of China stealing regional leadership from under Japan's nose. Well not exactly.
It pays to keep things in perspective. China's RMB is not convertible, and this limits its appeal as a replacement to the USD. How significant is inconvertiblity? Well, according to the Bank of International Settlement figures, the RMB is going nowhere fast. In fact the cause of the Yen continuous fall since 1990s has been a combination of its own domestic recession and the rise of the Euro. China simply does not figure as a cause for Japan's currency being run down in the region's central banks, and it is unlike that the RMB will be able to steal a march on the yen as the region's intermediate currency.
As Japan's IIMA points out, Japanese Yen is still a more suitable currency to inherit part of the USD mantle than the Chinese yuan. But as Japan has learnt, in addition to suitability based on actual use/usability (ribensei), it is vitally important that the economy have a "presence" of its own in the world market. While China is probably ahead in this regard, let's not forget Japan's role in initiating these discussions about the role of the USD.
What is not usually raised in the discussion of China's (high profile) criticism of the USD is that China is not the first Asian giant to propose that the world, or at least the region, move away from the dollar as the intermediate currency of choice. Nearly a decade before Japan was calling, quietly, for something similar. But whereas Japan was, and still is, dependent on the US for its security and status in the international order, China is not. Or at least, China, unlike Japan, seems to believe that it is a great power in its own right. More on that in subsequent posts.
In fact China is really riding on Japan's coat tails with regard to the whole internationalisation of the Yuan idea. Since the early 1990s, Japan started talking about the internationalisation of the yen, with the goal of reducing the region's reliance on the dollar. Japan has already done all the research necessary to argue persuasively for the need to move away from the dollar. But unfortunately for Japan, while it has made its case that the dollar should go "down", it has not persuaded the region that the Yen should go "up". Infact, since the Asian Financial Crisis of 1997, holdings of the yen have in fact fallen in the central banks of the region.
Unsurprisingly, China's moves have caused some consternation among Japan monetary policy makers as yet another example of China stealing regional leadership from under Japan's nose. Well not exactly.
It pays to keep things in perspective. China's RMB is not convertible, and this limits its appeal as a replacement to the USD. How significant is inconvertiblity? Well, according to the Bank of International Settlement figures, the RMB is going nowhere fast. In fact the cause of the Yen continuous fall since 1990s has been a combination of its own domestic recession and the rise of the Euro. China simply does not figure as a cause for Japan's currency being run down in the region's central banks, and it is unlike that the RMB will be able to steal a march on the yen as the region's intermediate currency.
As Japan's IIMA points out, Japanese Yen is still a more suitable currency to inherit part of the USD mantle than the Chinese yuan. But as Japan has learnt, in addition to suitability based on actual use/usability (ribensei), it is vitally important that the economy have a "presence" of its own in the world market. While China is probably ahead in this regard, let's not forget Japan's role in initiating these discussions about the role of the USD.
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