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'
TEXT SIZE - +

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

Multimedia Relatives of South Korean Ferry Victims Fire at Authorities

36 people are confirmed dead, but some 270 remain trapped on board More

War Legacy Haunts Vietnam, US Relations

$84 million project aims to clean up soil contaminated by Agent Orange More

Wikipedia Proves Useful for Tracking Flu

Technique gave better results than Center for Disease Control (CDC) and Google’s Flu Trends 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.
Ukraine, Russia, United in Faith, Divided in Politicsi
X
Michael Eckels
April 19, 2014
There is a strong historical religious connection between Russia and Ukraine. But what role is religion playing in the current conflict? In the run-up to Easter, Michael Eckels in Moscow reports for VOA.
Video

Video Ukraine, Russia, United in Faith, Divided in Politics

There is a strong historical religious connection between Russia and Ukraine. But what role is religion playing in the current conflict? In the run-up to Easter, Michael Eckels in Moscow reports for VOA.
Video

Video Face of American Farmer is Changing

The average American farmer is now 58 years old, and farmers 65 and older are the fastest growing segment of the population. It’s a troubling trend signaling big changes ahead for American agriculture as aging farmers retire. Reporter Mike Osborne says a new report from the U.S. Census Bureau is suggesting what some of those changes might look like... and why they might not be so troubling.
Video

Video Donetsk Governor: Ukraine Military Assault 'Delicate But Necessary'

Around a dozen state buildings in eastern Ukraine remain in the hands of pro-Russian protesters who are demanding a referendum on self-rule. The governor of the whole Donetsk region is among those forced out by the protesters. He spoke to VOA's Henry Ridgwell from his temporary new office in Donetsk city.
Video

Video Drones May Soon Send Data From High Seas

Drones are usually associated with unmanned flying vehicles, but autonomous watercraft are also becoming useful tools for jobs ranging from scientific exploration to law enforcement to searching for a missing airliner in the Indian Ocean. VOA’s George Putic reports on sea-faring drones.
Video

Video New Earth-Size Planet Found

Not too big, not too small. Not too hot, not too cold. A newly discovered planet looks just right for life as we know it, according to an international group of astronomers. VOA’s Steve Baragona has more.
Video

Video Copts in Diaspora Worry About Future in Egypt

Around 10 percent of Egypt’s population belong to the Coptic faith, making them the largest Christian minority in the Middle East. But they have become targets of violence since the revolution three years ago. With elections scheduled for May and the struggle between the Egyptian military and Islamists continuing, many Copts abroad are deeply worried about the future of their ancient church. VOA religion correspondent Jerome Socolovsky visited a Coptic church outside Washington DC.
Video

Video Critics Say Venezuelan Protests Test Limits of Military's Support

During the two months of deadly anti-government protests that have rocked the oil-rich nation of Venezuela, President Nicolas Maduro has accused the opposition of trying to initiate a coup. Though a small number of military officers have been arrested for allegedly plotting against the government, VOA’s Brian Padden reports the leadership of the armed forces continues to support the president, at least for now.
Video

Video More Millenials Unplug to Embrace Board Games

A big new trend in the U.S. toy industry has more consumers switching off their high-tech gadgets to play with classic toys, like board games. This is especially true among the so-called millenial generation - those born in the 1980's and 90's. Elizabeth Lee has more from an unusual café in Los Angeles, where the new trend is popular and business is booming.
Video

Video Google Buys Drone Company

In its latest purchase of high-tech companies, Google has acquired a manufacturer of solar-powered drones that can stay in the air almost indefinitely, relaying broadband Internet connection to remote areas. It is seen as yet another step in the U.S. based Web giant’s bid to bring Internet to the whole world. VOA’s George Putic reports.
AppleAndroid