News / Asia

Asian Economies Struggle With Capital Flows, Finance Leaders Warn of 'Currency War'

Asian Economies Struggle With Capital Flows, Finance Leaders Warn of 'Currency War'
Asian Economies Struggle With Capital Flows, Finance Leaders Warn of 'Currency War'

Asian governments are struggling to manage strong capital flows that could threaten their economies. But international finance leaders worry such efforts may destabilize the global financial system.

As the yen neared a 15-year high against the dollar Friday, Prime Minister Naoto Kan said Japan will continue to watch for "excessive" moves in the  exchange rate and will take necessary action.

Japan's central bank recently has stepped into the markets to weaken the yen. A strong yen hurts exports, which are crucial to the country's economic recovery.

But international finance leaders fear market interventions could trigger a cascade of similar actions by other central banks, leading to a "currency war."

International Monetary Fund Managing Director Dominique Strauss Kahn warned Thursday against using currencies as "weapons" to gain trade advantages.

In the past, Asian central banks aggressively managed their currencies. Over the past decade, they did significantly less management, but in recent weeks, currency traders say there have been new signs of intervention.

Song Seng-Wun, chief economist of the bank CIMB in Singapore, says Asian central banks are not trying to stop their currencies from rising. Instead, they are managing the appreciation so it will not be too disruptive to their economies.

"They're just moderating it to make it less destructive and for businesses, more predictable," said Song Seng-Wun. "Because if you allow it to move too fast, it makes planning very difficult, if not impossible."

However, the region's largest economy, China, tightly controls its currency, the yuan. China's trading partners want the yuan to appreciate by 30 percent or more to correct what they say is an undervalued currency. Beijing argues doing so would force many Chinese manufacturers to shut down.

Some economists say Asian central bankers are less worried about export competitiveness than about the dangers of strong capital inflows.

Song says the weak economies in the U.S. and Europe have led investors to move money to more profitable markets in Asia's fast-growing economies. That pushes up prices, including the value of Asian currencies.

In recent days, the Thai baht and Malaysian ringgit hit 13-year highs against the dollar. The Korean won rose to a five-month high, while the Indonesian rupiah neared three-year high.

"It's like the globe is one big tray of water and the flow is going from the side, which is being held up toward the other side, which is Asia," said Song. "So governments are trying to balance trade a little bit, rather than letting the money flowing through make the exchange rate go up very fast, which in turn could attract even more [money]."

The problem with that foreign capital can flow out very quickly in a crisis.

In the mid-1990s, Asia saw large inflows of capital, which was quickly pulled out when economies weakened in 1997. That led to a rapid depreciation of currencies despite intense market intervention by central bankers. The resulting economic crisis led to severe recession and thousands of failed businesses across the region.

Shin Jang-sup is an economics professor at the National University of Singapore and previously was an adviser to the South Korean Ministry of Finance. He says Asian central bankers face a more serious problem today than in 1997.

"Their interest rates are historically low, and if they lower their interest rates further they face inflationary pressure," said Shin Jang-sup. "So it's very difficult. Also, after the Asian financial crisis, they carried out various market reforms to facilitate international flows of capital, so it's very difficult to re-introduce some form of capital control. Also the amount of money is much larger than before."

The International Institute of Finance says $825 billion in capital will flow to emerging markets this year, while the Asian Development Bank says more than $200 billion stayed in Asia last year.

On Thursday in Washington, the IMF's Strauss-Kahn said while capital flows are important to global development, he recognizes the dilemma countries face.

"In the short term, we may not be able to have a revaluation of a currency enough to mitigate the effect of the capital flow," he said. "Then you have prudential action that can be taken. Also, you can accumulate reserves and at the end, as we say for months now, we can understand that some element of capital controls can be put in place."

Given its complexity, Strauss-Kahn says, the best way to address the issue is through cooperation among the Group of 20 nations.

In 1985, Japan, the United States, Germany and Britain signed the Plaza Accord, and allowed the dollar to weaken to help Washington narrow its trade deficit and recover from a severe recession.

Whether a similar international agreement can be cobbled together is among the topics international finance leaders are expected to discuss this week in Washington at the IMF and World Bank annual meetings. Government leaders are likely to also take up the issue at the G20 summit in Seoul next month.

You May Like

Tunnel Bombs Highlight Savagery of Aleppo Fight

Rebels have used tunneling tactic near government buildings, command posts or supply routes to set off explosives; they detonated their largest bomb this week under Syria's intelligence headquarters More

Sierra Leone Launches New Initiative to Stop Ebola Spread

Government hopes Infection and Prevention Control Units, IPC, will help protect patients and healthcare workers More

UN Official: Fight Against Terrorism Must Not Violate Human Rights

UN High Commissioner for Human Rights says efforts by states to combat terrorism are resulting in large scale rights violations against the very citizens they claim to defend More

This forum has been closed.
Comments
     
There are no comments in this forum. Be first and add one

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Video Claims to Show Shia Forces in Iraq Executing Sunni Boyi
X
Jeff Seldin
March 05, 2015 2:36 AM
A graphic mobile phone video is spreading on the Internet, claiming to show Iraqi forces or Shia militia executing a handcuffed Sunni boy. Experts have yet to verify the video, but already Islamic State followers are publicizing it across social media, playing on deep-rooted sectarian fears. VOA’s Jeff Seldin reports.
Video

Video Video Claims to Show Shia Forces in Iraq Executing Sunni Boy

A graphic mobile phone video is spreading on the Internet, claiming to show Iraqi forces or Shia militia executing a handcuffed Sunni boy. Experts have yet to verify the video, but already Islamic State followers are publicizing it across social media, playing on deep-rooted sectarian fears. VOA’s Jeff Seldin reports.
Video

Video Ukrainian Authorities Struggle to Secure a Divided Mariupol

Since last month's cease-fire went into effect, shelling around the port city of Mariupol has decreased, but it is thought pro-Russian separatists remain poised to attack. For the city’s authorities, a major challenge is gaining the trust of residents, while at the same time rooting out informants who are passing sensitive information to the rebels. Patrick Wells reports for VOA.
Video

Video Volunteer Gauge-Watchers Help Fine-Tune Weather Science

An observation system called CoCoRaHS is working to improve weather science, thanks to thousands of volunteers across the country who measure precipitation in their own backyards, then share their data through the Internet. VOA's Shelley Schlender reports.
Video

Video NASA Spacecraft Approaches a Dwarf Planet

NASA’s Dawn spacecraft will make history on Friday, March 6, when it becomes the first man-made object to orbit a dwarf planet named Ceres. It is located in the asteroid belt between Mars and Jupiter, almost 500 million kilometers from Earth. Among other objectives, Dawn will try to examine two mysterious bright white spots detected on the planet’s surface. VOA’s George Putic has more.
Video

Video Young Muslims Radicalized Online

Young Muslims are being radicalized ‘in their bedrooms’ through direct contact with Islamic State or ISIL fighters via the Internet, according to terror experts. There are growing concerns that authorities and Internet providers are not doing enough to counter online extremism - which analysts say is spread by a prolific network of online supporters around the world. Henry Ridgwell reports from London.
Video

Video African Americans Recall 1960's Fight For Voting Rights

U.S. President Barack Obama and thousands of people will gather in the small southern U.S. city of Selma, Alabama, Saturday, March 7th to commemorate the 50th anniversary of a historic voting rights march that became known as “Bloody Sunday." VOA’s Chris Simkins traveled to Alabama and introduces us to some of the foot soldiers of the voting rights struggles of the 1960’s.
Video

Video Positive Messaging Transforms Ethiopia's Image

Ethiopia was once known for famine and droughts. Now, headlines more often point to its fast-growing economy and its emergence as a regional peacemaker. How has Addis Ababa changed the narrative? VOA's Marthe van der Wolf reports.
Video

Video Cyber War Rages Between Iran, US

A newly published report indicates Iran and the United States have increased their cyber attacks on each other, even as their top diplomats are working toward an agreement to guarantee Iran does not develop a nuclear weapon and to free Iran from international sanctions. The development is part of a growing global trend. VOA’s Al Pessin reports from London.
Video

Video Answers Elude Families of MH370 Passengers

For the families on board Malaysia Airlines flight MH370, an airline official’s statement nearly one year ago that the plane had lost contact with air traffic control at 2:40 AM is the only thing that remains confirmed. William Ide reports.

All About America

Circumventing Censorship

An Internet Primer for Healthy Web Habits

As surveillance and censoring technologies advance, so, too, do new tools for your computer or mobile device that help protect your privacy and break through Internet censorship.
More