A critical vulnerability

China has revaluated the yuan by 0.05 percent after three consecutive days of devaluation. The revaluation came a day after the announcement from the People’s Bank that the likelihood of additional devaluation is not high. The central bank’s about-face translates into Beijing’s attempt to mitigate the impact of yuan devaluation on the global economy. Most international market watchers forecast a gradual decline of the yuan around 5 percent without big adjustments for a while. As China has cleared up the uncertainty over the scope and degree of yuan devaluation, global financial markets appear to have settled down.

China’s devaluation means Beijing has taken a step back from its growth strategy based on boosted domestic consumption. So far, Beijing has adhered to the strong yuan despite the weak yen and euro. Compared to July last year, the yuan’s value rose more than 20 percent over the Korean won and more than 30 percent over the Japanese yen. As a result, China could not but manipulate the yuan’s exchange rates. Whereas U.S. politicians are infuriated over “China’s beggar-thy-neighbor currency war,” the Treasury Department showed a rather cautious response to the yuan devaluation, and the International Monetary Fund went further by calling it “an appropriate measure.”

Though markets are beginning to adjust to China-induced fluctuations of the yuan, the three-day yuan devaluation has posed serious challenges for Korea. First of all, it proved that our economy is the most vulnerable to yuan fluctuations among other currencies. The devaluation caused the won’s value to plunge by a whopping 2.29 percent for two days and led the Kospi index to helplessly fall below the ceiling of 2,000. More worrisome is the steep fall of the won - second only to the yuan’s descent - among major currencies. And foreign investors fled our stock market at an alarming rate.

Among major currencies of the world - other than globally used key currencies - the Korean won is nearly the only one whose capital market is totally open. Countries with key currencies can print money at will to purchase commodities from overseas. But Korea cannot and must rely on hard currencies to import anything. Our currency is at a disadvantage when an international currency war breaks out. That’s why our bourse serves as an “ATM” for foreign investors when key currencies fluctuate. Bank of Korea Gov. Lee Ju-yeol expressed concern Thursday that Korea is vulnerable to external risks, as seen in the yuan instance. It is time to think about the future globalization of the won.

JoongAng Ilbo, Aug. 15, Page 30