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NYTimes notices market manipulation study -- seven months later

Section: Daily Dispatches

By Andy Mukherjee
Bloomberg News Service
Monday, May 8, 2006

Li Yong, China's vice minister for finance, said he had heard
a "rumor" that the U.S. dollar was headed for a 25 percent drop. If
the gossip was true, the consequences would be "shocking," he said.

Li's comment, which he made at a discussion on global financial
imbalances last week at the annual meeting of the Asian Development
Bank in the Indian city of Hyderabad, was aimed directly at fellow
panelist Tim Adams, the U.S. Treasury undersecretary of
international affairs.

The unspoken message was: "Don't try to talk the dollar down." And
Adams knew better than to ask, "Well, what are you going to do about
it?" The answer to that question has already begun taking shape:
Asia may be getting ready to fix its currencies to a local anchor,
dumping the region's unofficial dollar peg.

Even as they continue to pile up U.S. debt in their foreign-exchange
reserves to keep their currencies stable against the dollar, Asian
nations, China among them, are preparing for a scenario where the
dollar does indeed collapse under the weight of a record U.S.
current account deficit.

At the Hyderabad meeting, finance ministers of China, Japan, and
South Korea got together with their counterparts from the
Association of Southeast Asian Nations, or Asean. The 13-nation
group said it would sponsor a research project, titled "Toward
greater financial stability in the Asian region: Exploring steps to
create regional monetary units."

This is no innocuous academic exercise. Regional monetary units are
a euphemism for a parallel Asian currency, an idea that has been
around since the 1997-98 financial crisis and is now, for the first
time, entering the realm of policy making.

Both Japan and China are extremely serious about it and are vying to
take ownership of the project.

An Asian Currency Unit, or ACU, will be an index that seeks to
capture the value of a hypothetical Asian currency by taking a
weighted average of several of them. The weight for a particular
currency in the index may be determined by the size of the economy
and the quantity of its total trade.

What's the big deal with the ACU? Given the data, anyone can set up
an index. It isn't that Asia is talking about replacing its national
currencies with the ACU. A European-style single currency in Asia is
at least decades away. The ACU is an accounting unit; it won't
change hands in the physical world.

The ACU will start making a difference when it becomes the fulcrum
of exchange-rate management in Asia. There is some sign that Asian
nations want to do just that.

Korea, Japan, and China agreed in Hyderabad to "immediately launch
discussions on the road map for a system to coordinate foreign
exchange policy."

The ACU can help a lot in such coordination. It can become a basket
peg against which any Asian nation can fix the value of its currency
within a band. The ACU itself will float.

Why might the ACU work when the now-defunct European Currency Unit,
on which the concept is modeled, didn't? One good reason, as noted
by economist Barry Eichengreen of the University of California at
Berkeley, is that Europe's need for a parallel currency was
satisfied by the dollar.

The ACU may well emerge as a viable currency for denominating export
invoices, bank loans, and bond issuances if the dollar is no longer
perceived as a safe storage of value.

So far Japan has been driving the ACU concept. Haruhiko Kuroda, a
former Japanese vice minister of finance and currently the president
of the Asian Development Bank, was vigorously pursuing it. The ADB
was going to start computing and publishing several ACUs sometime
this year.

One such ACU would have comprised 13 members, including the Japanese
yen, the Chinese yuan, the Korean won, and the currencies of
Singapore, Malaysia, Thailand, Indonesia, Brunei, Vietnam, Cambodia,
Laos, Myanmar, and the Philippines. Another ACU would have included
both the yuan and the Taiwan dollar -- and that would have been
anathema to China. Nor would China have liked to peg the yuan to an
ACU that was overly dominated by the yen.

Now China has taken control. While the research will still be
conducted in Japan, Asean will take the decision on the composition
of the ACU. While Japan is a member of this club, its influence is
in decline. The association is now firmly under China's thumb.

While China continues to exhort the U.S. not to follow weak-dollar
policies, it, like everyone else, can only guess about the longevity
of the present global imbalances.

If there is a sudden collapse in the dollar, the U.S. appetite for
imported goods may vanish. The Chinese export engine may seize up
and its fragile banking system may collapse under a spate of new bad
loans. The idea behind the ACU is to buy some insurance, however
inadequate, against all of this.

With its "my currency is your problem" attitude, the U.S. has made a
negotiated settlement of global imbalances a diplomatic non-starter.
China isn't willing to consider the U.S. argument that quicker
appreciation of the yuan may prevent a costly adjustment later.

Once again in Hyderabad, Undersecretary Adams tried valiantly to get
this message across to Chinese Vice Finance Minister Li. He was
wasting his breath.

Li, as Adams noted wryly, "knows all my talking points."


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