Commentary: Washington's selective vision on currency pegs
Bloomberg News
January 25, 2005
William Pesek Jr. 

KUALA LUMPUR Of all the questions affecting Malaysia's outlook, none is as intriguing - or arguably as important - as its currency peg with the U.S. dollar. Yet there's something odd about the relaxed way in which government officials and businesspeople discuss the highly sensitive matter.
 
Unlike most national leaders, who duck currency questions at all costs, Prime Minister Abdullah Ahmad Badawi is happy to entertain queries from reporters about the fate of Malaysia's cornerstone financial policy.
 
"There is no time frame but, as I've said before, no regulation is cast in stone," Abdullah said recently. "The peg will remain for the time being." The comments echoed recent ones by his predecessor, Mahathir bin Mohamad, who linked the ringgit at 3.8 to the dollar in 1998 to curb speculation during the Asian financial crisis.
 
It's no mystery why Malaysian officials seem so calm about this touchy issue: They don't have the Bush administration breathing down their necks. True, the U.S. Treasury secretary, John Snow, more or less declared war on pegged currencies during President George W. Bush's first term. Yet only China seems to be on the hot seat. Unpressured are Malaysia and Hong Kong, two economies better prepared to float their currencies than China is.
 
Why hasn't Bush dispatched Snow to Malaysia to seek a currency change? And why didn't the U.S. commerce secretary, Donald Evans, criticize the Hong Kong dollar's peg to the U.S. dollar when he visited China recently?
 
The White House's seemingly inconsistent policy on currency pegs suggests that its concern has to do with politics, and nothing but.
 
U.S. companies fear the consequences of China's economic expansion and want the government to ease their pain. That's why the United States isn't bellyaching over dollar pegs in smaller economies. As Bush begins his second term, now is a good time to reconsider the U.S. strategy on currencies. Here are three reasons why.

China will not be pushed around. What Snow has not grasped is that China, as a nascent world power, will not allow itself to be seen as bowing to Washington.
 
In Beijing, meanwhile, the Communist Party is struggling to maintain credibility. That is apparent in the government's muted reaction to the recent death of the former party leader Zhao Ziyang. He spent the last 15 years under house arrest for showing sympathy with students during the Tiananmen Square upheaval of 1989.
 
Every time Snow pushes China publicly to let the yuan rise, he merely delays such a step. This issue requires thoughtful, behind-the-scenes diplomacy, not podium-thumping for the world's television cameras.

China's financial system is still fragile, and debt has everything to do with it. The nation's 9 percent pace of economic growth and its appetite for commodities masks the fact that the banking system remains hobbled by bad loans.
 
Standard & Poor's estimates that it will take $600 billion to clear state-run banks of loans in arrears. That China refuses to revalue the yuan even slightly suggests that things may be more precarious than we know.
 
China also faces a dual challenge unprecedented in modern economics. Not only must it slow growth to avoid an inflationary boom-and-bust cycle, but it also needs to create jobs for hundreds of millions of people. The currency peg will offer a crucial source of stability in the process.

Finally, the United States has its own public relations woes. When finance ministers from the Group of Seven leading industrial nations meet next month, the U.S. currency is likely to attract more criticism than that of China. The dollar's weakness against the euro is irking Europeans, who fear a slowdown in economic growth.

What Snow should consider is that the more the dollar falls, the less likely a Chinese revaluation becomes. China grows more competitive along with the United States as the dollar drops.
 
Japan's potential response also matters. If Tokyo starts selling yen to bolster the dollar, China, fearing a loss of competitiveness to Japan, will be slower to let the yuan rise.
 
The Bush administration can use its second term to undertake a fresh start in Asia. One way to do that is to couch its views on the region's policies in economic terms, and not obviously political ones.

Copyright © 2006 the International Herald Tribune