.jpg) special economic advisor to President Lee Myung-bak |
A key South Korean official advocated the governments’ intervention in the currency market, as excessive volatility continues to pose a threat to global and national financial markets.
His loose interpretation of the G20 communique signals that China, Japan and other nations suspected of market intervention will be able to justify their actions in the future, despite outcries from free-market fanatics in the United States and elsewhere.
According to Shin Hyun-song, the special economic advisor to President Lee Myung-bak, the G20 nations are not entirely rejecting the need of government intervention, even though they agreed to pursue “market-determined exchange rate systems.”
“What is important but often missing in media reports is the following part, that the market-determined exchange rate systems need to ‘reflect underlying economic fundamentals’,” Shin told reporters on Friday on the sidelines of the G20 Seoul Summit.
“This means that countries can intervene in the currency market when the market is in disorder and when there is a gap between the market rate and underlying economic fundamentals,” he said.
Shin, a professor of economics at Princeton University, has been advising Korean negotiators at the G20 this year. He has provided a theoretical basis for the government’s adoption of macro-prudential measures, such as limiting the foreign exchange derivative positions of banks.
What is critical now for a G20 consensus is how to define “fundamentals.” For example, China lets its currency rate move in a narrow band and claims that it is moving along long-term economic fundamentals. And Japan‘s government claims that the yen’s value is not a reflection of its economic fundamentals, as the latter are being damaged by distortions in the currency rate.
As well as the currency market, Shin said that the overall global financial market economy is still too fragile and the current situation does not look very good, as was seen in a stock market collapse in Korea between Thursday and Friday.
“The financial market is not stable today, and that is mainly because of the European debt woes. This again confirms how financial crises in one part of the world can easily spread to another part,” he said.
On advice from Shin, the Korean government has been gauging its timing to launch further measures to tighten the financial market and protect it from volatile global capital movement. Shin and other top officials such as Chin Dong-soo, the chairman of Financial Supervisory Service, have said that bank levies on non-deposit liabilities and taxes on foreign purchases of government bonds are both possible options.
Shin rejected the notion that the bank levy is an anti-globalization capital control, because its aim is not to control the flow of money, but to make banks more prudent when borrowing money on a short-term basis from abroad.
