Exchange rate diplomacy

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Exchange rate diplomacy

It was the first time I had seen a veteran ruling party lawmaker get worked up about a foreign exchange rate. During a private meeting, the lawmaker turned the topic to foreign exchange and advised a bureaucrat in his presence to pay more attention to the exchange rate.

“If we do not control the situation, we have no chance in next year’s general election. Exporters will be wrecked and the economy will sink. Regardless of what the opposition does, the ruling party cannot win. Politicians know by instinct. The economic risk is bigger than the political one at the moment,” he observed.

He was worried that President Park Geun-hye had been too lax on the foreign exchange front compared to her Japanese counterpart Shinzo Abe.

The lawmaker was not exaggerating. The won has appreciated by far the largest among key currencies around the world over the last two years. The yen has plummeted over 60 percent against the won. Exports have been hit hard. The percentage drops are not enough to tell the whole story. We can take Hyundai Motor’s share price. A rise in the won’s value affects Hyundai Motor’s revenue and profitability as the automaker competes directly with Japanese rivals in overseas markets. Naturally its stock price has been hurt. Hyundai Motor’s shares closed below 140,000 won ($126) on Tuesday, a level not seen for the last five years. They fell 10.36 percent on the day, the first double-digit daily plunge in four years. In just a day, the company lost 3.5 trillion won in market capitalization.

One analyst said foreign investors literally dumped Hyundai Motor stock because of the won. It has reached a level at which the exporter cannot profit. He was unsure if the selling spree would continue or stop here.

“But one thing’s for sure. Unless the currency rate changes direction, there is little hope for the company’s stock.”

I am all for liberalization in the foreign exchange market. Exporters - mostly large manufacturers - were sole beneficiaries of a cheap won in the last 20 years since the late-90s Asian currency crisis. Large companies fattened up while individuals got poorer. Consumers sacrificed their purchasing power to buttress exporters - only to discover a worsening in income polarization. The foreign exchange rate needs to be normalized and free. But my thoughts have changed recently.

Excess is never good. The won has appreciated too fast and too steeply. The country has no hope if exports, which contribute mightily to the gross domestic product, sink. The economy cannot move along with exports in the dumps even if domestic consumption is somehow energized. Domestic demand can only improve when exports are able to prop up the economy. An official at the presidential office believes what is necessary are diplomatic efforts and a foreign exchange policy.

“Japan blatantly manipulates its foreign exchange rate but it gained permission from the United States. The yen cannot fall to 125 against the dollar without consent from the U.S. A currency policy is one of the most important agenda items in foreign policy. A country can be hurt badly if it is stigmatized as a currency manipulator.”

The mood in Washington is not good, he observed. The Organization for Economic Cooperation and Development demanded Seoul to lower its defense against foreign exchange speculation, saying the measures can be seen as currency interference. China gives little comfort these days. The International Monetary Fund, in a recent, positive evaluation, noted currency reforms by Beijing and praised its endeavors to let the yuan rise. Seoul could be the main target if Beijing becomes free of all recriminations. China had the power to stand up to the U.S, but Korea does not.

If Seoul cannot make a strong case for its foreign exchange policy, it should plead for understanding. Of the $89.2 billion surplus in last year’s current account, $60 billion derived from trade with China. The trade surplus with the U.S. amounted to less than half. Seoul must convince Washington that its surplus has not come from the U.S. President that Park Geun-hye is visiting in Washington next week. She must make a strong case on currency issues when she is there.

JoongAng Ilbo, June 4, Page 30

*The author is an editorial writer of the JoongAng Ilbo.

by Yi Jung-jae

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