Fresh fears of currency war looming large

The Korea Times

The Korea Times

National

Wed, December 6, 2023 | 21:15

G20 in Seoul

Fresh fears of currency war looming large

Posted : 2010-11-05 16:58

Updated : 2010-11-05 16:58

Seoul downplays forex feud at G20

By Cho Jin-seo

The $600-billion injection plan of the U.S. Federal Reserve has sparked complaints from fellow G20 nations, with only five days left before the critical G20 Seoul Summit.

A variety of responses from China, Japan, Brazil, Korea and many other countries to the so-called Quantitative Easing 2 (QE2) were all tinted with a degree of protectionism. Some are even beginning to contemplate the revival of the “currency war” debate, which was thought to be dead at last month’s Gyeongju G20 finance ministers’ meeting.

On Friday, Korea’s Ministry of Strategy and Finance and the Bank of Korea announced they will launch another inspection on foreign exchange positions of banks, even though they just finished one this week. The announcement reflects worries in the government that the spillover of the cheap dollar could flood stock and bond markets in Korea, which makes the relatively small economy even more vulnerable to the volatility of the global capital movement.

As a further measure of capital control, financial regulators also launched a task force to prepare the reintroduction of tax on foreign purchases of Korean bonds, a high-ranking official said.

“We have started to back-track records of bond purchases. When we figure out how much money is actually flowing from whom, then we will be able to reintroduce the tax,” the official told The Korea Times. He refused to be identified because of the sensitivity of the issue.

Earlier in the day, the Chinese government criticized the QE2 program of Ben Bernanke, the chairman of U.S. Fed. Cui Tiankai, vice foreign minister, cynically suggested that the United States should not blame China for its trade surpluses or exchange rate when the country itself is effectively devaluing the dollar by the expansionary monetary policy.

Finance ministers of Brazil, France and Japan also joined the queue of critics, saying they will bear the brunt of the cheap dollar.

The Fed is to buy $600 billion worth of government long-term bonds in order to lower the market interest rate, which they hope will lower the cost of borrowing by businesses.

Some view this as treachery on the G20 agreement made in Gyeongju last month. At the finance ministers and central bank governors’ meeting, Bernanke and Tim Geithner, the U.S. secretary of treasury, signed the joint statement that said that they will “continue with monetary policy which is appropriate to achieve price stability and thereby contributes to the recovery.”

Seoul’s G20 officials said they have no other choice but to hope that the U.S. won’t take further actions to provoke others.

“I want to believe that the Fed had listened to other countries so it has minimized the size of the QE,” said a Seoul official in charge of policy coordination for the Seoul Summit, Friday. “I won’t say that it was a violation of our agreement.”

Others were more critical.

“At the sovereign level, small countries like Korea are just helpless in this kind of situation. Even a 1-percent movement in the global capital market can flood the entire country,” another high-ranking official at the G20 committee said. “Countries are seeking ways to control the flow of cross-border capital, but they are not fundamental fixes. That is why the G20 is working on to set up a global financial safety net at the Seoul summit,” he said.

Korea and the G20 are discussing various options to protect small nations from the rapid global capital movement, but the plan is facing objections from Germany and some other rich nations due to the fear of moral hazard.

cjs@koreatimes.co.kr