I was not all that impressed by the “day after” coverage of Thailand’s capital controls in the financial press.
Everyone initially looked for parallels to 1997 – and signs that the most recent bout of turmoil in Thailand could lead to a cascade of trouble in other emerging economies.
Most stories quite rightly noted that the risk of contagion much smaller this time around. However, the overall tone of the coverage still often struck me as off. The focus was on the impact of a new round of Asian contagion could have on American and European investment in emerging economies. But parallels to 1997 were played up a bit too much without noting the enormous changes that have taken place since 1997.
The coverage today – particularly the Wall Street Journal’s reporting on the thinking of the Thais and the New York Times’ reporting on the pressures facing all Asian economies -- has been much better.
But I still want to put forward my list of the key differences are between 1997 and today -- and note a couple of parallels that in my view haven't gotten enough attention.
1/ Emerging Asia doesn’t need capital from the US, Europe or Japan. That is a bit of an over-generalization, as there are some economies in emerging Asia that are running current account deficits. But in aggregate, emerging Asian economies save more than they invest – and are net lenders to the rest of the world. Thailand itself ran a current account deficit in 2005, but is on track for a significant surplus in 2006. In aggregate, all the private capital that flows into emerging Asia is effectively lent back to the industrial world, whether by private investors, or, more often by central banks. That is a key change from 1997.
2/ Private investors betting on a rise in the baht or won or renminbi are effectively betting against the central banks of these countries every bit as much as those who bet against the baht or won or rupiah did in 1997.
In 1997, central banks were intervening to keep their currencies from falling. Speculators would say borrow baht, and then sell the baht to the Bank of Thailand for dollars – a bet that pays if the baht falls. In 2006, Asian central banks are intervening to keep their currencies from rising. Foreign investors have dollars and want baht. And there is more demand for baht than demand for dollars in the private market. That normally would lead the value of the baht to rise. But right now the central bank often steps in, selling the baht foreign investors want and buying the dollars foreign investors don’t want.
That means that the central bank loses – and foreign investors gain – if Asian currencies rise in value over time. The central bank also has to remove the baht it sold to foreigners from circulation (sterilization) to avoid too-rapid money growth, but that is a separate issue.
3/ As a consequence of (2), almost all Asian economies are looking to discourage foreign capital inflows in various ways while encouraging their own nationals to invest abroad. Private investment abroad helps reduce the central banks need to step in to balance the market – there is more private demand for dollars. Steps that discourage foreign inflows also help reduce the need for central bank intervention to balance the market.
Thailand is an extreme case. But the same basic trend is clear in other countries. Think Korea, Lone star and KEB. Think of Korea’s efforts to make it harder for Korean banks to borrow funds from abroad -- though that is a policy designed to make it harder for the local banks to bet against the central bank. Think of China’s evolving attitude towards foreign investment – and reluctance to change the existing de facto rule that basically makes it impossible for foreigners to come in and buy existing Chinese businesses. Greenfield investment is still welcome, but probably a bit less welcome than before. Think of China’s desire to liberalize controls on capital outflows – while tightening controls on inflows.
The basic trend is pretty clear. Most Asian economies do not particularly want more money to come in. Asia already has more savings than it can invest at home -- it doesn't need the rest of the world's savings.
That is a change from 1996 and 1997. Then many emerging Asian countries not only needed to borrow from abroad, but actively encouraged short-term foreign borrowing. Thailand did so through the notorious Bangkok Interbank facility.
The changed context means that investors are fleeing for very different reasons now. In 1997, they were fleeing from a potential devaluation -- along with large pontential losses on foreign currency loans that local borrowers without export revenues (think office parks) couldn't repay. On tuesday, investors fled policy measures designed to keep them from coming in the first place.
There is a point here that is worth highlighting. The interests of players in the local markets are not necessarily the same as the interest of the central bank. Thai stock brokers like a rising stock market as much as US stock brokers. They hold baht and hold equities, and foreign inflows bid the value of both up.
The central bank, by contrast, is often left holding the dollars foreigners bring in. It either buys the dollars or lets its currency be bid up. And since the Thai central bank was intervening, it ended up being long dollars -- and short baht. Which isn't fun if the baht is rising.
Here I would say FT did a bit better job highlighting the key issue than others did on Tuesday. The FT leader noted:
But given an exchange rate that has appreciated by almost twice as much against the dollar as its neighbours this year, in spite of rapid accumulation of foreign exchange reserves, the central bank obviously felt it had to do something.
The FT argued that the market reaction to Thailand's controls will keep other central banks from following Thailand’s path. I would add that it hasn’t changed the fact that many other central banks still feel the need to do something.
There is a fourth important point -- one that is in someways similar to 1997 and in other ways very different.
4/ Pegged exchange rates constrain policy choices. In 1997, Asian countries with current account deficits were pegged to a dollar -- which at the time was rising v. the yen. That didn't help. Today Asian currencies with current account surpluses are pegged to a falling dollar. Which also isn't helping.
But there is a big change. Back in 1997 and 1998, China's resistance to RMB depreciated helped the rest of Asia. Right now, China’s resistance to faster RMB appreciation constraints the policy choices of all other Asian economies. China’s government – through its central bank – offers buyers of Chinese goods a bigger consumption subsidy than the Thai government offers buyers of Thai goods.
Here, I would say press coverage has been very good. Many economists – Roubini and Roach for example -- tend to be critical of American criticism of China’s peg on the grounds that American criticism of other countries lets the US off too lightly for its own economic sins. The pot shouldn’t call the kettle black.
I increasingly think that this is a bit too Amerocentric a view of the impact of China’s peg. China’s peg isn’t just a subsidy for a bunch of over-consuming Americans who wouldn’t save any way. African textile producers, Brazilian leather goods manufacturers, Mexican auto parts makers, Thai auto producers, Eastern European machinery firms and Malaysian electronics companies are impacted by the subsidy of the consumption of Chinese-assembled goods as much the machinery producers in the US Midwest and textile and furniture makers in the US south.
And the size of the subsidy China is offering Europe, Korea and Thailand for the consumption of Chinese goods is increasing more rapidly than the subsidy China is offering Americans for the consumption of Chinese goods. The RMB is rising v. the dollar. But it is falling v. a host of other currencies. That matters.
I found it interesting that the research direct of China’s central bank criticized the Thais for not emulating China’s own macroeconomic policies. Thailand’s mistake was letting the baht rise in the first place.
Tang Xu, head of the research department at the People's Bank of China, suggested that the steep losses on the Bangkok stock market were due to a willingness by Thai authorities to let the baht rise too fast. (Lex has a nice chart illustrating the relative rise of different Asian currencies).
The Thais didn’t criticize the Chinese. Rather today Thailand’s central bank governor joined China in criticizing the US. The problem, according to the Thailand, is that the US isn’t doing more to help support the dollar – and thus is creating problems for a host of other countries. Particularly countries that either peg to the dollar or countries that compete with countries that peg to the dollar!
The steep decline of the dollar is punishing Asia’s smaller economies and should be addressed by global financial regulators, the governor of the Thai central bank, Tarisa Watanagase, said Wednesday. As the Thai stock market rebounded from a record one-day drop of 15 percent, closing up 11 percent Wednesday, Ms. Tarisa defended the government’s abortive attempt to block short-term foreign investment, portraying Thailand as a victim of the huge imbalances in trade and savings that send trillions of dollars sloshing in and out of developing economies.
“This is not a problem unique to Thailand,” Ms. Tarisa said in an interview. “I’m sure that if this sort of problem is not cured in a cooperative manner, we could see similar measures elsewhere.”
That suggests a fifth point, one that has some parallels with 1997 though the context has totally changed.
5/ Asia and the US increasingly disagree on macroeconomic policy
The US government would like to see Asia decouple their currencies from the dollar -- gradually to be sure, but a bit faster than say China is moving now.I am sympathetic: Asian countries that have tied themselves too tightly to the dollar for too long, financing widening imbalances rather than putting more pressure on the US to adjust.
Many in Asia would like the US to do a lot more to make their preferred currency regime – one still based on a tie to the dollar – a bit easier for their central banks to maintain. They don't think their link to the dollar is a problem; they think US policies that don't support the dollar are the problem.
I wouldn’t count on any changes in US policy. The US has never geared its macroeconomic policies toward maintaining the dollar's external value.
I also wouldn’t count on Asia’s willingness to finance the US no matter what policies the US adopts – particularly if they are asked to intermediate not just local savings, but the savings of folks around the world who would rather finance Asian than the US even though Asia doesn’t need the money and the US does.
One thing is I think relatively clear. Unhappiness with the policy choices required to sustain the current system is growing. Especially among Asian central bankers themselves. They just don't agree on any way out.