from Follow the Money

The governor of China’s central bank might want to take notice

May 31, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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The former governor of Thailand’s central bank is being held accountable for squandering Thailand’s foreign exchange reserves defending the Baht peg back in 1997, and in a big way (though he is appealing).

Former Thai central bank governor Rerngchai Marakanond, who oversaw the country’s failed attempt to protect its fixed exchange rate regime on the eve of the 1997 Asian financial crisis, was ordered on Tuesday to pay back the Bt186bn (US$4.57bn) spent in the futile defence of the currency. ... a local court chastised Mr Rerngchai for "grave negligence" for exhausting Thai foreign exchange reserves battling currency speculators.

... Mr Rerngchai was the only person sued by the administration of Thaksin Shinwatra, the Thai prime minister, in connection with the debacle, under a law that allows civil servants to be held liable for losses they cause to the government.

... For years before speculators attacked the baht, the International Monetary Fund had warned that Thailand’s fixed exchange rate regime was unsustainable, given a current account deficit of about 8 per cent of gross domestic product.

But Thailand’s intertwined business and political elites supported the system, as the country had well over $70bn in outstanding foreign currency denominated debts.

Note that back in 1997, the Thai elite all wanted to cling on to the peg -- they all had dollar debts that they could not pay after a devaluation. Abandoning the peg earlier, no doubt the right thing to have done, would also have been immensely unpopular.

Obviously, the situation in China is a bit different. China has a huge current account surplus (estimated at 8% of GDP in 2005) and is trying to keep its currency from appreciating, Thailand had an equally huge current account deficit in 1996/97 and was trying to keep its currency from depreciating.

But there are still some similarities. Issuing renminbi debt to buy dollars is not going to be a winning trade. Look at what happened in Korea, which issued won debt to buy dollars. And China is issuing lots of renminbi -- both cash and renminbi denominated central bank bills -- to buy dollars. The People’s Bank of China will take losses, potentially large ones, when -- and it is a question of when -- the renminbi is revalued to reflect China’s growing productivity.

It truly is unprecedented for a country that already has reserves equal to about 40% of GDP -- reserves sufficient to meet all tests of reserve adequacy, to be adding to its reserves at China’s current pace. China’s 2005 GDP, in dollars, is likely to be around $1775. Its 2005 reserve accumulation looks likely to be least $250 billion (14% of GDP), and could possibly top $300 b (17% of GDP). China’s reserve no doubt grew far faster in April and May than in the first quarter -- and China’s trade surplus is usually far bigger in the second half of the year as well.

(and yes, I do need to write about something other than China)

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