China's leading role among Asia-Pacific economies means it must end the renminbi peg to the US dollar by the second quarter of 2010 to avoid harm to other countries' export trade, according to Rodney Jones, principal of Wigram Capital.
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Speaking today at the Asia RiskCongress, Jones, who runs an advisory firm providing macro-economic analysis and advice on Asia, Australia and New Zealand, told delegates Asia needs more foreign exchange flexibility in the long term, but warned there is uncertainty over whether policymakers in China will let this happen in the short term.
The renminbi has been effectively pegged to the dollar since July 2008, and the Chinese currency is now considered to be up to 40% undervalued, meaning other Asian economies see the price of their exports rising relative to China as the dollar falls.
Jones said while all of Asia has benefited from Chinese imports and the 4 trillion yuan stimulus package announced in November 2008, the region is increasingly tied to China and its monetary policy has consequences far beyond its borders.
Outside of China the lesson learned from the 1997–98 Asian financial crisis was that currencies should be a shock absorber not an amplifier, and should be allowed to weaken in response to shocks, he claimed. In addition, foreign currency debt should be limited and foreign exchange reserve holdings kept much larger than private foreign exchange liabilities.
Pointing to the Australian dollar as an example of how a currency can be used as a cyclical shock absorber, Jones demonstrated how it had collapsed at the same time as other currencies in 2008 but its climb back had been equally steep and was now at similar levels to December 2007. He noted the Korean won is particularly correlated with the Australian dollar but – increasingly – so is the rest of the region.
Next year will be critical for Asia-Pacific economies, as capital is flowing back into the region and growth has quickly rebounded to 5–6%, Jones said. In the third quarter, China's foreign exchange reserves climbed to $116 billion while the region excluding China and Japan now has reserves of $90 billion, putting pressure on all currencies to appreciate. But if these countries let their currencies start to rise they would quickly become uncompetitive against China, he warned.
He said: "By the first or second quarter of 2010, China will have to respond. I would like to see Asia move more like the Australian dollar. This crisis has shown that the Australian dollar works as a shock absorber and insulates the economy. But it is all conditional on Beijing."LINK
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