By Jane Rickards in Taipei
The policy debate over Asian currency management has been long, tortuous and often very sensitive. But that’s not deterred Taiwan’s central bank governor from joining in with a fresh call for the region to set up a formal exchange rate coordination mechanism.
By promoting stable exchange rates, Perng Fai-nan, the governor, said that such a mechanism would help avoid the economic instability caused by sudden inflows of foreign capital, which can inflate asset price bubbles and stifle the competitiveness of exporters.
Those are concerns shared by other Asian governments, but the political and economic paths to progress are fraught – not least because China is unlikely to support any venture that it cannot shape.
In an article in The Banker magazine published on August 30 and released in Taiwan by the island’s central bank on Monday, Perng said that capital mobility has brought benefits for many countries, but it has also been closely linked to financial crises.
He wrote:
Regional exchange-rate stability is conducive to promoting economic and financial stability. When exchange rates are stable, lower transaction costs and reduced uncertainty, will boost growth in intra-regional trade and investment.
Asian countries should set up a formal regional exchange-rate coordination mechanism through which stable currency relationships can be established.
That would also help to foster economic integration in the Asia region.
Taiwan’s interventionist central bank, which manages the island’s exchange rate, has been struggling to prevent short-term capital inflows and currency speculation from leading to an appreciation of the New Taiwan dollar that would reduce the competitiveness of its exports.
But Chen Miao, the chief macroeconomic forecaster at the private Taiwan Institute of Economic Research, said although many Asian nations might have the political will to support a currency coordination mechanism, it was unlikely to be economically feasible.
In the European Union, Chen said, the economies of the participating European countries were at more similar stages of development than Asian countries – but even then it took them years and much political will before they were able to coordinate the exchange rates of their individual currencies and ultimately use one currency, the euro.
Countries in Asia are “much more diverse” than those of the EU, with some having post-industrialized economies and some rural ones, Chen said.
The disparity between the ‘have’ and the ‘have nots’ is too large a divide to cross, despite the political will.
Other analysts, however, would pick out an opposite set of problems: a coordination mechanism is economically logical, but politically impossible.
When China said it would adjust its renminbi exchange rate mechanism in June, one beyondbrics contributor raised the idea of Asia setting up a so-called snake mechanism – mimicking the one established in 1972 to maintain stable exchange rates in the European Economic Community (EEC) and to foster regional integration.
But China is unlikely to let that happen unless it is the boss: Beijing has been very clear about its desire to make the renminbi a new international reserve currency.
An economist writing earlier this year in China Daily, Beijing’s official English-language newspaper, hailed the many and varied ways in which the renminbi was being internationalised across Asia and said:
The deepening financial connections indicate that the establishment of a regional monetary alliance in East Asia is imminent.
But China’s neighbours, Taiwan included, are nervous about being crushed by its economic might, so they will be wary of letting currency coordination happen on Beijing’s terms.
