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WASHINGTON ― The buzz word in the global financial world is the “currency war,” which the United States is allegedly waging with other Western countries against China. But Korean financial leaders participating in the annual meeting of the International Monetary Fund (IMF) were of a consensus that, if there is any war under way, it is a fictional war between U.S. Democrats and Republicans ahead of their November midterm elections.
Kim Choong-soo, governor of the Bank of Korea (BOK), said, “I do not know why the IMF uses the expression 'currency war.' I think there is some hidden motivation,” he said, during a breakfast meeting with Korean reporters.
Kim shares this view with other top officials. Many agree that politicians and the media in the United States and other Western countries are taking it out of proportion for “domestic consumption” purposes. In other words, U.S. politicians are competing to use angry voters against China, which is emerging as a new superpower thanks to its undiminished trade surplus with the U.S., for their partisan advantage in the November midterms.
Sakong Il, chairman of the Presidential Committee for the G20 Seoul Summit, and Shin Hyun-song, special advisor to President Lee Myung-bak, told the Korea Times last week that the political hype around the exchange rate competition will fade away, once the U.S. general election takes place on Nov. 2.
“We are lucky that the U.S. election will take place ahead of the G20 Seoul Summit. If it was the other way round, then the summit could be a mess,” another official said in a cynical response.
Retracing how the term was first used, one is bound to find it odd. It was Brazilian Finance Minister Guido Mantega who officially first mentioned it in September. He used the term to raise fear of the recent intervention made by countries such as Japan, Korea and Taiwan in the foreign exchange market.
But strangely, the idea has somehow become a weapon, picked up by the U.S., to attack China, which has consistently used a government-controlled exchange rate system.
In fact, Japan, Korea and Taiwan have seen their currencies gradually appreciate over the past few months regardless of minor interventions. Only the Chinese yuan has not been affected. But the “yuan undervaluation” is not a recent issue so it doesn't merit a new stage such as a currency war.
Furthermore, economists differ on whether the yuan-dollar rate is actually at an unsustainably low level. China argues that the low value of the yuan, if sustainable, only reflects that its economy is more cost-efficient than that of the dollar nation. Therefore, forcing China to appreciate its currency is a challenge to the principle of free market where the more cost-efficient is allowed to beat the less cost-efficient.
Kim, the central bank governor, did not elaborate about what he meant by the “hidden motivation” of the people who are talking loudly when referring to the currency war. Brazil indicated that the motivation could be national interest, by adopting a tougher capital control rule right after Mantega's currency war rhetoric was made. “It was a justification for Brazil's domestic policy,” one Korean official said Saturday.
Dominique Strauss-Kahn, managing director of the IMF, began to tone down his speech on this issue during Saturday's press conference in Washington. Firstly, he told reporters that Mantega's remark was “probably too strong a word.” Then secondly he said that the real challenge for the global economy is not the exchange rate war, but rather the rapid movement of hot money across borders.
The IMF managing director also hinted at his inner thoughts just enough for listeners to have doubts.
“The move in the exchange rate will be more a consequence of the rebalancing than the contrary,” he said. “A win-win situation in which everybody is better off, rather than trying to find a domestic solution to global problems and which, as we know, doesn't work.”
With a big election ahead, this is a tough call.
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