The influence of RMB on exchange rate policy in ot

1“TheInfluenceoftheRMBonExchangeRatePolicyinOtherEconomies”TakatoshiItoUniversityofTokyoOctober19,2007WashingtonDCPreparedforPetersonInstituteforInternationalEconomicsConferenceChina’sExchangeRatePolicy1.IntroductionTheEastAsiancountries,mostnotablyChina,areoftencollectivelydescribedasaregionthatmanages,ifnotmanipulates,theexchangeratetowardundervaluation,achieveslargecurrentaccountsurpluses,andaccumulatesforeignreserves.IndeedtheEastAsianregion,aswellasoilproducingnations,isonthesurplussideintheaccountingofglobalimbalances.However,unlikethefirstimpression,theexchangerateregimesofEastAsiancountriesarediverseanduncoordinated.Alackofcoordinationprevents,ratherthanhelp,globalexchangerateadjustmentthatisessentialtoresolveglobalimbalances.1CountriesthattradewithChinaandcompetewithChinainexportstothethirdmarketarekeennottoallowtoomuchappreciationofowncurrenciesvis-à-vistheChineseRMB.WhenChinaisallowingitscurrencytoappreciateonlyverygradually,theneighboringcountrieswillnotallowsharpappreciationoftheirowncurrencies.1SeeBlanchard,Giavazzi,andSa(2005)andObstfeldandRogoff(2005)forstandardreferencesforglobalimbalancesandthenecessityofexchangerateadjustment.2Currently,countriesunderthemanagedexchangerateregime,suchasKorea,Singapore,andThailand,tendtokeepthetrade-weightedexchangeratestable—ratherthanthedollarpeg.AstheweightsofChinainexportsandimportshaveincreasedinthesecountries,theinfluenceofChineseexchangeratepolicyonthesecurrenciesisconsideredtohaveincreased.Thetrendisfairlycertain,butthevariationsarediverse.Inthepastseveralyears,appreciationsoftheKoreanwonandtheThaibahtaremuchmorepronouncedthanverygradualappreciationoftheChineseRMB.However,thefactthatThailanddecided,butshortlyafterrescinded,capitalcontrolsinDecember2006wasacircumstantialevidencethattoomuchappreciationvis-à-visRMBaswellastheUSdollarisnotwelcomebythesecountries.Inturn,theChineseseemstobeworriedverymuchaboutitsexportcompetitiveness.InspiteofpressurefromtheUnitedStatestoallowfasterappreciation,ChinahasallowedappreciationbyonlyabouttenpercentsinceJuly2005.(Itis7.5RMB/USDonOctober5,2007,asitwas8.28RMB/USDonJuly20,2005.)AlthoughChineseofficialsoftenciteslowprofitmarginsofexports,especiallytextilesandagriculturalgoods,theappreciationwouldbeeasiertoswallowifChinaissurethatotherAsiancurrencieswillfollowRMBintheeventoffasterappreciation.Insum,ChinamostlikelyismorewillingtoacceptRMBappreciationifneighboringcountries,inadditionKoreaandThailand,allowfasterappreciation.EastAsiancountriesdefinitelyaremorewillingtoallowappreciationifthespeedofRMBappreciationaccelerates.Thisisacoordinationfailure.3Therefore,IwillarguethatiftheEastAsiancountriescoordinateintheirexchangerateregimes,thepaceofappreciationvis-à-vistheUSdollar,whennecessarytoresolveglobalimbalances,willaccelerate.OneofthepossiblemechanismsofsuchcoordinationistoadoptanAsianCurrencyUnit(ACU),andeachcountryaimsatastablerelationshipwiththeACU.Therestofthispaperisorganizedasfollows.Section2reviewsthelessonsoftheAsiancurrencycrisiswithregardtotheexchangerateregimes.Section3explainsseveralbasketcurrencyproposals.Section4reviewstheconceptofcoordinationfailures.Section5presentssomeempiricalobservations.Section6discussespoliticaleconomyoftheexchangerates.Section7discussesEastAsia’sroleinresolvingglobalimbalances.Section8concludes.2.ExchangeRateRegimesinEastAsiaOneoftheimportantlessonsthatEastAsiancountrieshavelearnedfromtheAsiancurrencycrisisof1997-98wasthattheexchangerateregimematters.Therearetwopartstothislesson.First,thewell-knownpartofthislessonisthatthedefactofixedexchangerateregimetendstoinvitedoublemismatch,whichisbanks’balancesheetswithlong-termlocalcurrencyassetsandshort-termforeigncurrencyliabilities,duetounderappreciationofcurrencyriskbylendersandborrowers.Second,lesswell-knownpartofthislessonisthattheexchangerateregimesadoptedbyneighborcountriesdoinfluencehowtochoosetheexchangerateregimebyacountry.Thisaspecthasbeencalledthecoordinationfailureoftheexchangerateregimesinthecloselylinked4region.2ThailandwaschoosingadefactodollarpegbecauseMalaysia,China,Indonesiaandothereconomicallyimportantneighborswereadoptingadefactodollarpeg,becauseThaiexportershadtobecompetingagainstneighbors’exporters.Duetothecurrencycrisisof1997-98,mostAsiancountriesshiftedtheirexchangerateregimestomanagedfloatsystemswithvaryingdegreeofforeignexchangeinterventions.NotableexceptionshavebeentheChina,HongKong,andMalaysia.ChinahadheldtheRMBtightlyfixedtotheUSdollarsince1994,throughtheturbulentperiodoftheAsiancurrencycrisis,untilJuly2005.OnJuly21,thePeople’sBankofChina(PBOC)madeachangetoitsexchangerateregime,animmediateappreciationby2percent,andmovingtoamoreflexibleregime.Later,itwasproventhatPBOCallowedtheRMBtoappreciate,verygradually,by2to3percentayear.HongKonghasmaintaineduntilnowthefixedexchangeratetotheUSdollar.Malaysia,firstfloateditscurrencywiththePhilippinesandIndonesia,rightafterThaibahtdepreciation,butlaterfixedtheexchangeratetotheUSdollar(September1998).ItquicklyfollowedChinainappreciationandflexibilityonJuly21,2005.Inthatsense,on