Revaluation would protect Asia against oil shocksTime to appreciate
BEIJING Like the proverbial rabbit transfixed by the lights of an oncoming car, East Asian governments are motionless in the face of the high price of oil. Asian stock market indexes dance by 2 percent or more a day in response to the price of crude, and economists have been revising down their estimates of growth. Compounding the negative outlook are worries that China's cooling measures will bring a chill to the region.
Yet none of these governments has the imagination to take the one measure that would significantly reduce the impact of the price of oil on their economies: appreciating their currencies. For all the self-congratulatory talk about regional monetary cooperation, most remain fixated with competing against each other rather than addressing the implications of global price developments. Likewise on energy. At a meeting this week in Manila, Japan, China, South Korea and the 10 members of the Association of Southeast Asian Nations will promise long-term cooperation on oil and gas supplies, but say nothing about the immediate issues.
Here in China, the government is preoccupied with administrative measures to curb investment and inflation. It is considering raising interest to dampen loan demand. Overinvestment is a serious problem, but balanced growth in China demands efforts to stimulate consumption as well as curb investment. China also badly needs to convince its trading partners that it is now a market economy. It cannot do so with its current exchange rate regime.
Raising interest rates is likely to increase household savings and may not deter investment. Meanwhile, consumers are being hit by rising prices of many goods other than oil, particularly food and mineral commodities whose domestic prices are influenced by international ones.
A revaluation of, say, 20 percent followed by a managed float would reduce at a stroke the inflationary impact of oil and other imports. It would in many cases also enable exporters to raise dollar prices of exports and thus prevent the deterioration in China's terms of trade resulting from a weak, dollar-pegged yuan and rising commodity import prices.
A similar story is found in South Korea. It may not have investment-led overheating. But it does have inadequate consumer demand. Hopes of a recovery in consumption have been put in doubt because of the impact of oil and other commodity prices on consumer buying power. Yet instead of looking to ameliorate this problem through the exchange rate, the authorities remain obsessed with continuing to export their way to growth. They appear not to have noticed that their export boom has been driven by Western and Chinese demand, not by a weak currency.
Countries like South Korea that are dependent on energy imports are bound to suffer some income loss from high oil prices. But given the size of its trade surplus, South Korea can easily absorb such a loss without having to see domestic demand needlessly curtailed. The same is the case in Taiwan, where the trade surplus is at almost embarrassingly high levels while domestic demand recovery is feeble. Both Taiwan and South Korea would see their terms of trade benefit from a 20 percent revaluation - as would Japan. East Asia, which dominates the electronics and shipbuilding industries and has a strong position in automobiles, can be a price setter for many products.
In Southeast Asia - the Philippines and Indonesia excepted - much of the same story also applies. Thailand's current account surplus is being barely dented by oil prices, and Malaysia's surplus is now in the same league of excess as Taiwan's.
It should go without saying that all the above applies to Japan. Its problem is domestic demand. Continuing to resist yen appreciation while exports are booming is simply hurting the interests of the one part of the economy which has long been struggling: consumption.
There is also potential in many countries to limit the impact of oil by reducing energy taxes in the short term and, if necessary, raising other taxes.
Revaluation is not a cure-all for expensive energy. But it could be a big help to an Asia with excess savings, bulging reserves and weak consumer demand. If these economies end up being run over by an oil price of more than $40 a barrel, there can be only one response: It's partly your own fault.