Since late last year, there have been two disturbances in the international currency markets. Although their impact was limited, Beijing reacted to both in a manner that demonstrates its sensitivity to problems in the world economy and which should give us pause for thought.
The first disturbance was Argentina's financial crisis, which finally spun out of control late last month. Economic woes spurred a popular uprising. Within a short time, Argentina's presidency changed hands five times. By early this month, the system that pegged the country's currency to the US dollar, which had been in place for 10 years, collapsed. The value of the Argentine peso plunged 30 percent.
Argentina could be said to be different from China in almost every respect. Its troubles won't have much impact on China.
But Hong Kong's dollar is also pegged to the US dollar. Hong Kong doesn't have massive foreign debt like Argentina. In fact it has large foreign currency reserves as a legacy of British rule. But the governments of China and the Special Administrative Region couldn't help but feel nervous because the territory's economy has steadily deteriorated since 1997. The Hong Kong Monetary Authority, however, has stated that Argentina's crisis won't influence Hong Kong's exchange-rate peg. Chief Executive Tung Chee Hwa (董建華) also said the peg would definitely continue.
The exchange-rate peg was implemented in 1983 after an agreement was reached for the territory to be returned to China, seriously denting investor confidence. The value of the Hong Kong dollar fell dramatically. The exchange-rate peg stabilized the currency and therefore became one of Beijing's totems and very political. No fluctuations whatsoever were allowed regardless of economic conditions.
In the past 10 years, the econo-mies of Hong Kong and the US have both changed a lot, but Hong Kong cannot use monetary policy to influence its economy. During the Asian financial crisis (1997 to 1998), it was mainly because the Hong Kong dollar was unable to float freely that there was no alternative but to allow the stock and housing markets to lose half their value.
Now, whether to unpeg its dollar from the US dollar is no longer just Hong Kong's problem; it would require Beijing's agreement. Although the Basic Law stipulates that Beijing only has jurisdiction over Hong Kong's defense and foreign affairs, it really also manages the economy because any decision to devalue the Hong Kong dollar would also affect China's currency and economy, which Beijing would not allow.
The second disturbance to upset China -- actually to anger it -- was the devaluation of the Japanese yen. When the yen fell to ?120 to the US dollar and approached ?130, China sent warnings to Japan through the Ministry of Foreign Affairs, financial officials and even the media calling the action "premeditated." Some warnings even compare the devaluation to Japan's attack on Pearl Harbor.
When, during the financial crisis of 1998, the devaluation of the New Taiwan dollar affected Hong Kong's currency, China described the situation as a plot by then-president Lee Teng-hui (李登輝). In fact, from the time China started economic and social reforms in 1978 until it unified its two-tier exchange rate system in 1994, the Chinese yuan fell from 1.7 to 8.7 to the green-back. But nobody made accusations about some "secret plot" even when the exchange rate fell, in one go, from 5.8 to 8.7 just before the two-tier system was unified.
A decision to devalue a currency is an internal issue for any country. Only allowing one's own currency to devalue but not allowing other countries' currencies to do so is a kind of hegemony. China's economic hegemony and political hegemony are two sides of the same coin. When the yen fell to ?133 to the US dollar, China, as though it were the world's financial policeman, warned that it wouldn't permit the exchange rate to fall lower than ?140. One cannot help but wonder what it will do if the rate does falls that low.
China has consistently boasted of its economic accomplishments and vowed that the yuan won't be devalued. But why has it made such a big fuss about the yen's devaluation? Obviously it has its secret reasons that are too awkward to be expressed publicly, especially regarding the true condition of its economy.
The US recession has already affected China's exports and the Chinese economy is facing the impact of WTO entry. The authorities are deeply afraid that any slight disturbance will weaken their grip on power. The devaluation of the yen could cause devaluations in other Asian currencies, affecting China's exports and causing the economy to decline, unemployment to rise and the stock market to suffer -- all of which could lead to a financial crisis.
The state-owned banks that control China's economy illustrate this point. Beijing admits that 27 percent of their outstanding loans are bad debts, amounting to US$218 billion. Private estimates put the figure at US$480 billion, equivalent to 44 percent of GNP. If international standards were applied, they would already have been declared bankrupt several times over.
It is precisely because the situation is so precarious that financial problems are never allowed to develop to the point at which they affect people's confidence. In the same way that any political upheaval is nipped in the bud, financial instability must also be eradicated at the earliest opportunity. China's Minister of Foreign Affairs Tang Jiaxian (唐家璇) recently said that China's economy will encounter difficulties this year even more severe than the Asian financial crisis. Not just Hong Kong, therefore, but even Japan will have to follow China's command.
Paul Lin is a political commentator based in New York.
Translated by Ethan Harkness
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