Asia Sentinel, 25 Dec 2008, Philip Bowring
The Spectre of Competitive Devaluations
Could China lead Asia and the world into a currency-driven spiral of protectionism? That may seem an extreme notion at a time when some Asian countries, not least Indonesia, are worried about their currency falling too far against the US dollar, in the process generating inflation and raising concerns about financial sector stability.
But no less an authority than the usually soothing, uncontroversial Asian Development Bank last week noted that Asian central banks had been buying dollars again. Countries needed “to avoid unnecessary and excessive interventions in the currency markets, especially to depreciate domestic currencies,” the bank said in a news release.
According to Lee Jong-wha, head of the ADB’s office of regional economic integration, they were being pushed towards devaluations to support ailing exporters. Japan, Korea and Taiwan have all shown collapses of more than 20 percent in exports, and even China is now in negative export territory.
But using devaluation to try to offset these problems is not only likely to enrage the US, which sees currency realignment as essential for restoration of global trade equilibrium, but could spark competitive devaluations among east Asian countries. They are supposed to be cooperating to stabilize trade, keep markets open and, through the Chiang Mai initiative and ASEAN+3 cooperation, avoid massive swings in the values of their currencies and otherwise help each other counter financial instability.
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