[A-List] A Single Asian Currency

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

`Mr Yen' argues case for single Asian currency
Louis Beckerling
The HK Standard

China and Japan should bury their historical differences in order to 
prepare the ground for the eventual emergence of a single Asian 
currency, Eisuke Sakakibara urged.

Appealing for an end to conflict between the rival economic powerhouses 
of Asia, the man formerly known as ``Mr Yen'' for the influential role 
he played on currency markets said such a ``rapprochement'' should take 
its inspiration from the development of a single currency in Europe.

``At the centre of the development of the euro was Franco-German 
rapprochement and in the same vein, Chinese-Japanese rapprochement is 
absolutely necessary to create a single Asian currency,'' Sakakibara 
told delegates yesterday.

``Let's put our historical legacy behind us. If Germany and France could 
do it, China and Japan could do it,'' he said.

Directing concluding remarks in his address to a session on ``national 
monetary policies'', Sakakibara added that he had supported his 
successors as head of finance in the Japanese government in all respects 
but one.

``China and Japan should co-operate with foreign exchange policies, and 
I am unhappy to see the pressure applied by Japan on China to revalue 
the yuan.

``The Japanese reporters should write that. I am criticising the 
Ministry of Finance.''

Joining Sakakibara in a strong defence of China maintaining its existing 
currency regime, which manages the exchange rate of the yuan in a tight 
trading band against the United States dollar, was Nobel economics' 
laureate Robert Mundell.

Accusations that China was ``manipulating'' its currency to export 
deflation and unemployment around the world did not bear examination, 
Mundell said. While China should address concerns expressed by its 
trading partners sympathetically, he said, it should leave its exchange 
rate system unchanged.

If China were to relent to the pressure and allow a revaluation of its 
currency, the impact could be ``devastating'' on its economy, warned 
Mundell, who is regarded as the ``godfather'' of the European single 
currency.

``If the currency were to appreciate by 40 per cent, it would cut growth 
in China to 5 per cent which would be devastating,'' he said.

It would also increase the losses borne by state-owned enterprises, 
which would aggravate the problem of bad loans in the banking system; 
trigger deflation, which would drastically reduce foreign direct 
investment (FDI) flows; and delay eventual convertibility.

A floating currency would also cut FDI since it would create fluctuating 
returns, and it would trigger a search for an alternative unit of 
account for pricing domestic assets such as property. ``Eventually 
people would price their assets in something like the [US] dollar,'' he 
said.

Among the only beneficiaries of a floating rate, argued Mundell, would 
be hedge funds.

``When European exchange rates were fixed in a currency `snake', the 
profits of hedge funds simply dried up as turnovers on forex markets 
fell overnight,'' he said.

The ``snake'' to which Mundell referred was created in 1972 when the 
Central and Eastern European countries responded to US domination of 
their currency exchange rates by agreeing to allow a fluctuation margin 
of the currencies in the ``snake'' of just 2.5 per cent.

In his comments to the panel discussion, Sakakibara said a loose form of 
such a ``snake'' could provide the first steps towards the eventual 
emergence of a single currency in Asia.

4 November 2003 / 01:33 AM