China's increasing regional influence will keep Asian governments from pressuring the world's fastest growing economy into letting its currency strengthen for fear of economic or political repurcussion. China has repeatedly said a decision on unshackling the yuan would depend on domestic conditions, after effectively pegging it to the US dollar for the past 20 months, even while it is under threat by Washington of being labelled a "currency manipulator" next month.
Policymakers from Bangkok to Tokyo told Reuters they are unwilling to challenge China on its currency, giving Beijing some diplomatic breathing room in the face of pressure from the United States, the euro zone, the International Monetary Fund and others who have said the yuan is undervalued. The yuan has been flat at 6.83 per US dollar since mid 2008. Since a recovery began in March 2009 though, increasing capital flows have been pushing up other Asian currencies between 7 to 27 percent.
That has given Chinese exporters an edge over their competitors and tied the hands of policymakers who have been forced to keep intervening in markets to weaken their currencies. The Asian officials interviewed separately over the past week were reticent to speak about yuan policy even on the condition of anonymity, keeping to their long-held practice of non-interference in Asia.
They also were worried about straining bilateral trade and diplomatic relations with China which has become strategically important. "We used to say when the United States sneezes, Japan would catch a cold. Nowadays, when China sneezes, Japan catches a cold. Japan's economy has become that much more reliant on Chinese growth," a senior Japanese government official involved with financial diplomacy told Reuters.
The official said Japan, which has a third of its overseas production in China and hence is vulnerable to rising costs there, is increasingly worried about signs of rising asset prices in China, though did not want to publicly discuss the issue. "We don't see much point telling China what their problem is because they themselves are well aware of it."
SYMPATHY WITH CHINA: Japan's export growth to China, on a three-month rolling basis, was at the quickest since 1985 at 55 percent in February, more than three times export growth to the United States.
This is precisely the dynamic that policymakers do not want to upset. "Policymakers are likely asking themselves, do we really need to upset China the way the US has and get all sorts of retaliatory actions, at a time when China ... is becoming a source of demand for Asian exports," said Sanjay Mathur, Asia economist with Royal Bank of Scotland in Singapore.
"There is zero gain in upsetting China." Japan's deputy finance minister publicly called on Beijing to hear calls for a more flexible yuan, though said sanctions against China would be wrong. Similarly, the Indian commerce minister said China's currency policy created problems for domestic exporters, but stopped short of calling for an end to the peg.
David Mulford, a former US Treasury official who was directly involved with a decision in 1988 to label South Korea and Taiwan "currency manipulators," believes the issue of China's exchange rate has become too politicised by the US government, and other governments in Asia as a result do not want to get involved.
If emerging markets like China keep growing at a much faster pace than advanced economies such as the United States, then the intensity of disputes in trade and exchange rates will increase. "If this spread is maintained for just a few years, the impact will become more political," said Mulford, now vice-chairman international at Credit Suisse. South Korea actually aligns itself with China's position on the yuan: fast currency appreciation is economically dangerous.
"Koreans don't so much have complaints about China's currency peg but rather feel sympathetic with their concern that a fast appreciation of the yuan could end up shutting down factories, laying off workers and causing social unrest," a high ranking financial authority said.
Senior officials in India, which is not as dependent on exports like Japan and Korea, said they were not confident pressure they could apply on Beijing would be successful in speeding up currency reform. "If the US can't get China to change its stance on the yuan, I don't see India making much headway either," an official who deals with currency policy said.
India's $1.2 trillion economy is expected to post the second-highest growth in Asia this year, Reuters polling shows. For now, Asian governments, especially those dependent on exports, have decided to absorb the disadvantage of having strengthening currencies. If capital flows attracted by their rising currencies keep pouring into the region though, the pain will increase.
Manu Bhaskaran, chief executive of Centennial Asia Advisors and former consultant to the Singapore government on economic matters, said until China lets the yuan strengthen, Asian policymakers will have to keep intervening in markets to contain currency strength. "Everyone is hurt by a weak RMB," he said, referring to the renminbi, or yuan.
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