The yuan, the dollar and Korea’s woes“What men should not scatter is not tears alone,” scolds a witty note at the entrance to a men’s rest room. Men, however, as well as women, should be able to shed tears properly. What is most needed by the Korean economy at present is, perhaps, tears. In other words, we should be able to express our pain properly.
Beginning tomorrow, the United States-China strategic economic dialogue will be held for two days in Beijing, China. It is unusual that even the U.S. Secretary of the Treasury, Henry M. Paulson, Jr., and the chairman of the Federal Reserve, Ben Bernanke, are joining the talks.
Despite the lofty theme of sustainable growth of the world economy and economic cooperation between the two countries professed on the surface, the dialogue should actually be seen as the prelude to a foreign exchange war. The pressure for the much-awaited appreciation of the yuan, the Chinese currency, has begun.
China is expected to post a 2006 surplus of more than $200 billion in trade with the United States. To balance its trade accounts, China has been pouring substantial amounts of its surplus into purchases of U.S. Treasury bonds. Meanwhile, the economy of the United States has grown, buoyed by debt. As a result, the country has accumulated a massive current account deficit. The present growth rate of the U.S. economy is not falling behind other countries. But world financial markets are paying attention to the downside of the country’s economic growth, which is dependent on debt. This is the background to the phenomenon of the weakening dollar across the world.
Mr. Paulson tried to set a soft tone in discussions of the yuan with a gentle, diplomatic remark, saying, “I believe that now China, too, can do more for the world economy.” But the atmosphere in the incoming Congress dominated by the Democratic Party is unusually combative. The lawmakers are determined that the United States should impose retaliatory tariffs of 27.5 percent unless China appreciates the yuan sufficiently. But China is not one to be easily intimidated and early on drew a line, saying, “The foreign exchange rate of the yuan is a national issue, one that should be decided by the government.” This statement is meant to check a U.S. attempt to make the issue an international one. At the same time, China took care to say that “the flexibility of the yuan will continue to expand.”
It is hard to expect that the Chinese currency will be appreciated at once. Through the dialogue this week, however, the two countries meet at a crossroad to choose cooperation or confrontation over the yuan’s foreign exchange rate, a ticking bomb for the global economy. Major economic research institutes have published reports that the Chinese currency is undervalued by roughly 15 to 40 percent. If the two countries lean toward cooperation, it can be safely said that the remaining job will be to decide on the timing and extent of appreciation.
If they plunge into confrontation, it will be hard to foresee what might happen even one step ahead. The United States would be expected to push ahead, determined to maintain the influence of the dollar as the key reserve currency of the world. To cope with this, China could dump the $700 billion in U.S. bonds it currently holds, thereby bringing huge repercussions to the international financial markets.
The problem for us is its impact on South Korea. The Bank of Korea estimated last year that if the yuan appreciated by 10 percent and the Korean currency, the won, accordingly appreciated by 2 percent, South Korea’s trade surplus would increase by $800 million.
The key to this optimistic scenario is to narrow the extent of the accompanying appreciation as much as possible.
That would make it possible to prevent economic recession, the exodus of businesses overseas and an increase in unemployment. Exporters are at a loss these days as the foreign exchange rate of the won has gone to 920 won per dollar. To avoid the repercussions of the cold snap from Beijing, we should come up with measures while calmly calculating the costs and benefits. Believing that the foreign exchange rate is determined only in the market is too naive. As happened with the Plaza Accord in 1985 on financial market intervention by major industrial countries, or the foreign exchange crisis of 1997, it is most dreadful when the exchange rate is artificially decided.
Now is not the time to make an overseas tour and boast, “The Korean economy has no problems.”
Rather we should pay attention to Japan, which pretends to suffer when it is actually enjoying a record boom. Japan has not forgotten the destructive power of the foreign exchange rate ― that the tail can wag the dog. We may also have to put on a road show of tears internationally.
To prevent the adverse effects of the appreciation of the yuan, we need to make an appeal that the Korean currency has been appreciated too high and the future of the Korean economy is gloomy.
It is far better to honestly complain of the difficulties of our economy than uselessly pour out trillions of won into controlling the foreign exchange rate.
*The writer is an editorial writer of the JoongAng Ilbo.
by Lee Chul-ho