A Strong Dollar is in the National Interest?

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Mahathir has been serving as the voice of Asian economic nationalism
since the Asian financial crises that began in Thailand on July 2,
1997.  His critical views of financial globalization has gained
sympathic ears in the region.

The key in this new round of the falling yen is of course once again
China.  China is committed to resist devaluing the RMB, pegged at 8.2
yuans to US$1. This position grew from a long undrstanding since 1997
with Washington on condition that no countervailing US trade tarriff
would be introduced against China if China does not devalue the RMB.
Many neo-liberals in Washington have suggested that the triggering event
that precipated the Asian crises of 1997 was China's devaluation of the
RMB from 5 to 8.2, thus driving exports from other Asian economies into
position of not earning enough to service their dollar debts.
It is controversial that even if the RMB were to upward valued instead
of devalued, China's market share gain in export would be slowed.
China's trade competitiveness is derived from many factors, the least of
which is undervalued foreign exchange, since exporters are granted tax
rebates to compensate for an overvalued exchange rate of the RMB,
sometime known as de facto devaluation.  China is able to do this
because the RMB is not freely convertable and only on current accounts.
Besides, despite all the efforts to join theWTO, China for the past
deacde has been practicing industrial policy along the line Robert Reich
proposed for Clinton, but overruled by Rubin.

Some policy planners in China are beginning to understand that the
threat of US countervaling tarrif is an empty threat.  The US can ill
afford import induced inflation during either boom or bust.  Further,
policy planners are beginning to understand that for an economy as large
as China, with practically insatiable pent-up demand, export will be a
side show compared to the potential of the domestic market. Instead of
exporting to accumulate needed capital for domestic development, the
experience of China in the past two decade is that the trade surplus
managed only to finance the US domestic economy.  I have written about
this many times.  China keeps US$200 billion in US government bonds
while it tries to attract $50 billion of FDI at high cost, not to
mention political concession.  Export in fact is a drain of needed
capital under a regime of dollar hegemony.

The strong dollar policy of the US is now running out of control.  The
Japanese is looking to make themselve rich by making their own currency
cheap!   This is because they own enough dollar to live off its
appreciation. The US now is faced with self imposed uncompetitiveness in
a globalized trade regime it invented.  A strong dollar now clearly
hurts US transnationals, like IBM, GE, MSFT because a large portion of
their revenue is now from non-dollar sources, but the dividends from
earning must be paid in dollars, where as the Japanese have the opposite
situation.  The 401K pension potfolio of US citizens is being diluted by
the strong dollar.  The sharp drop of the US equity prices is in no
small way related to the strong dollar.  So a strong dollar serve the
Japanese national interest more than its does that of the US.  Would
Washington now take the lead to push down the dollar?  If the goldbugs
manage to get the Fed to readopt the gold standard at $30K an ounce,
Japan will be bailed out.  As has been said, biailing out Japan requires
crashing the US economy.

Henry C.K. Liu

SCMP
Saturday, January 12, 2002

Currencies at risk over yen slide: Mahathir

JAKE LLOYD-SMITH in Singapore

Malaysian Prime Minister Mahathir Mohamad has raised the spectre of a
regionwide slide in currency values if a further weakening of the
Japanese yen forces China to devalue the yuan.

"If [the yen] goes down, I'm worried because it may cause China to
devalue, and if China devalues then of course it will force us to
rethink our . . . peg," Dr Mahathir told reporters yesterday.

The comments represent the bluntest expression of concern to date from a
regional leader about the possible consequences of a continued steep
fall in the Japanese currency.

They came on the heels of a visit to Malaysia by Japanese Prime Minister
Junichiro Koizumi, who is on his first tour of Southeast Asia since
taking office in April last year.

The ringgit was pegged at 3.80 to the US dollar in 1998 during the
regional financial crisis. Previously, the Malaysian prime minister has
said that the controversial linkage would be reconsidered only if rival
currencies registered substantial shifts in value.

However, currency analysts say that the prospect of Beijing re-fixing
the yuan's exchange rate to the US dollar at a lower level remains
extremely remote.

Mainland policymakers are more concerned with maintaining financial
stability as the country adjusts to its recent entry to the World Trade
Organisation, than any marginal loss of export competitiveness, they
say.

China resisted pressure to adjust its currency downwards during the
regional crisis, winning much praise at the time from multilateral
lending agencies and regional leaders for helping to prevent a harmful
round of copycat devaluations.

Dr Mahathir said Mr Koizumi had suggested in talks that Tokyo may act to
stem the yen's decline but offered no concrete assurances of action.

"He did not really give an assurance but he indicated, of course, that
they will try to ensure that the yen doesn't depreciate any more," he
said of the Japanese leader.

The yen has fallen by about 10 per cent against the US dollar over the
past two months amid a string of comments from senior Japanese officials
that they are comfortable with a weaker currency. Its slide is
seen as aiding Tokyo's efforts to restart its moribund economy.

The yen traded yesterday 132.28 yen to the dollar. Some currency
strategists have suggested that the yen, undermined by Japan's weak
economic fundamentals, could fall below 140 in the coming months.

Dr Mahathir said that any yen movement beyond 140 to the US dollar could
pressure Beijing into reconsidering the yuan's rate.

"They say 140 [yen to the dollar would force a rethink in Beijing] but I
don't know. We'll study it when it comes to 140," Dr Mahathir said.

The overt concern about the fate of the yen has cast a shadow over Mr
Koizumi's week-long tour of Southeast Asia, which takes in the
Philippines, Malaysia, Thailand, Indonesia and Singapore. He arrived
yesterday in Bangkok.

The diplomatic foray is intended, in part, as a bid by Japan to reassert
its position in the region and counter recent moves by China to
capitalise on its growing economic clout.

Last November, China said it would pursue a free-trade deal with the
10-member Association of Southeast Asian Nations, stealing a march on
Tokyo.

On Thursday, tensions about the yen's fall surfaced in China itself.

Guo Shuqing, the mainland's chief foreign exchange official, told
reporters that "deep-rooted economic problems" could not be solved by
"currency devaluations".

The yuan is allowed to trade within a very narrow range against the US
currency and is convertible only on the current account.