A decade ago, China was hailed Asia's saviour for stoutly defending its currency peg to the US dollar and containing the region's worst financial crisis. Today, it is accused of taking virtually all of Asia out of the global foreign exchange mechanism.
By aggressively intervening in the market to keep its yuan currency undervalued and its exports less expensive, Beijing is preventing most other Asian economies, from Japan to India, from letting their currencies rise against the dollar, US experts said in a new book to be released in Washington.
The mostly export-driven Asian economies fear allowing their currencies to appreciate in line with market forces would deprive them of their competitive position against China, the experts said in the publication "China: The Balance Sheet - What the World Needs to Know About the Emerging Superpower."
"Hence Chinas currency policy has taken virtually all of Asia out of the international adjustment process," Fred Bergsten, co-author and head of the Washington-based Institute of International Economics, told reporters.
The 206-page book, a joint project between the institute and another US think tank, the Center for Strategic and International Studies, will be launched on Monday, on the eve of Chinese President Hu Jintao's first White House visit.
His trip comes amid intense debate in Washington over the politically sensitive US trade deficit with China that hit 201 billion dollars in 2005, with American critics claiming that an artificially weak yuan gives Chinese exporters an unfair competitive advantage.
Amid the tensions, the book warned that "if China were to continue to intervene in the market, thus allowing its currency to appreciate only at the glacial pace evident since the summer of 2005, it increases the risk of stimulating a protective response in the United States and perhaps elsewhere."
Given China's fixed peg to the US dollar, the yuan depreciated after February 2002 when the value of the greenback began to depreciate significantly against major floating currencies such as the euro, the Canadian and Australian dollars, and the British pound, the book noted.
The dollar "needs to depreciate by an additional 25 to 30 percent" against the world's floating currencies in order to reduce global imbalances to a sustainable level, it said.
A substantial portion of this additional adjustment, it said, must come from Asia, where in recent years many countries, in addition to China, had been blamed for intervening in the markets to prevent their currencies from appreciating, thus limiting the overall depreciation of the dollar. "At least in some Asian countries, policies to avoid appreciation have been adopted because of a concern about a loss of national competitive position to China in third-country markets," according to the book.
Bergsten said Asian currencies were "dramatically undervalued" against the dollar, and "all of Asia has essentially been absent from the necessary global adjustment process because China keeps its currency down."
"This is a huge blind spot ... This is a huge factor in the world economy," he said.
Asia is the world's fastest-growing area and accounts for about 40 percent of the dollars trade-weighted index. It is home to half of the world's trade surpluses and makes up 90 percent of the global foreign exchange reserves build-up.
The flak China receives now for effectively shielding itself and the Asian economies from the vagaries of global foreign exchange market forces is in sharp contrast to the role it played during the 1997-1998 Asian financial crisis.
Then, amid applause from the international community, China maintained its yuan's fixed link to the greenback at a very high cost even as other East Asian currencies were compelled by market forces to break their dollar pegs and devalue sharply.
Its exports became more expensive amid the sea of devalued Asian currencies but China heeded the global call not to unravel its peg as doing so would worsen regional turmoil and trigger global competitive devaluation.
The "Balance Sheet" also highlights China's emergence as the main point of final assembly in Asian production networks.
"This means that even if the US global trade deficit shrinks, the United States is almost certain to continue to have a large bilateral deficit in its trade with China," it said.
Bergsten said "something like 55 to 65 percent" of all of China's exports to the world were assembled products in which the value added was "a relatively modest number."
The share of Asian countries in the US trade deficit "has plummeted over the last 10 years or so as China's share has risen, and if you put them all together, the share is actually lower," he said.
"So what we're showing in our numbers (is that the) bilateral deficit with China should really be interpreted as a US deficit with all of Asia, not as a bilateral problem with China to be singled out," Bergsten said.