AsiaÆs foreign exchange policies

Accusations against Asian policymakers of perfidious currency manipulation to help their exporters gain price advantages are commonplace, and have helped engender or justify protectionist rhetoric and reactions from governments in Europe and the US. 

While Western governments have characterised foreign exchange intervention by Asian central banks as manipulation, giving their exporters an unfair advantage, Asian policy makers have responded that their actions are motivated by a reasonable attempt to contain excessive currency speculation. A surge of capital inflows, they argue, can easily segue into outflows, creating currency volatility or worse -- a replication of the collapse in asset prices suffered 12 years ago, which forced them to bow to the intrusive demands of the IMF and other international lenders.

Their fears seemed justified in the immediate aftermath of the Lehman collapse last September as overseas investors liquidated positions in their equity and bond markets to meet cash calls, closed their carry trades and rushed to conventional safe havens, such as the US dollar. The immediate effect was to cause a decline in many Asian currencies, with central banks forced to spend valuable reserves -- their accumulated war chests -- to prevent precipitous falls.

Manitaining a war chest

Subsequent pressures for currency appreciation as exports started to benefit from lower exchange rates and as regional domestic demand started to pick up, gave central banks an opportunity to recover those lost reserves, while maintaining export competitiveness.

Richard Yetsenga, managing director of Asian FX strategy at HSBC, explained: "Earlier in [2009], central banks intervened in the foreign exchange markets to resist appreciation in order to accumulate reserves. More recently, policymakers have become keen to curb excessive liquidity, either in the form of global capital inflows or a build-up of domestic liquidity. For instance, Indonesia, Brazil and Taiwan have either placed restrictions on flows from abroad, or at least considered them. Also, the authorities have limited the access to local credit China, Hong Kong, India, Korea and Singapore, in particular to curb speculative bubbles in the property markets".

So although at first, many Asian currencies depreciated against both the dollar and yen, they later strengthened against the dollar and perhaps more critically, the renminbi.

Yet, as Claudio Piron, J. P. Morgan's head of Asian currency strategy pointed out, that strengthening has been less than convincing. 

"Despite the US dollar coming under renewed depreciation pressure [in November 2009], Asia FX hardly registers in terms of its currency appreciation," he said.

Piron calculated that only the Indonesian rupiah and Korean won rank among the top 10 performing emerging market currencies this year, with gains against the dollar and rankings of 18.03% (fourth) and 8.6% (seventh), respectively.

The basic charge then, is that Asian central banks are intervening to buy dollars and prevent their currencies from appreciating.

But, said Piron, "the reality is more complex". The majority of Asian currencies do not have the carry-yield appeal of their emerging-market counterparts. Secondly, though foreign investor inflows returned in the second quarter, it was only in the third quarter that the real force of foreign equity buying made its presence felt in Asia's foreign exchange markets.

Nevertheless, Piron conceded, foreign exchange reserves have risen more than $500 billion [to November] in Asia -- China alone is contributing $300 billion to that rise -- compared with $20 billion to $40 billon in other emerging countries. So intervention has been taking place, whether due to insecurities about the sustainability of nascent economic recovery or fears of speculative bubbles as equity investments from overseas have returned to record highs of more than $50 billion.

Regional cooperation

Another response to the crisis was a new impetus towards regional cooperation, with the extension of bilateral currency swap arrangements for settling trade transactions, most notably by China, which over the past year has forged half-a-dozen agreements with Hong Kong, Indonesia, Korea, Malaysia, Belarus and Argentina (and is negotiating one with Thailand).