Order Code RS22860
April 10, 2008
East Asia’s Foreign Exchange Rate Policies
Michael F. Martin
Analyst in Asian Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
The economies of East Asia have adopted a variety of foreign exchange rate
policies, ranging from Hong Kong’s currency board system which “links” the Hong
Kong dollar to the U.S. dollar, to the “independently floating” exchange rates of Japan,
the Philippines, and South Korea. Most of the economies of Asia have adopted
“managed floats” that allow their local currency to fluctuate within a limited range over
time as part of a larger economic policy.
Over the last few years, the value of the U.S. dollar has declined against most major
currencies. The various economies of East Asia have responded differently to the fall
in the value of the dollar. Some have allowed their local currency to appreciate against
the U.S. dollars; others have held the value of their currency against the U.S. dollar
relatively unchanged. While there is some evidence of competitive adjustments among
some of the exchange rates, it is unclear if these adjustments have had much impact on
exports to the United States.
While U.S. policy has generally supported the adoption of “free float” exchange
rate policies, most of the economies of East Asia consider a “managed float” exchange
rate policy more conducive to their economic goals and objectives. In addition, it is
uncertain if the adoption of “free float” exchange rate policies across East Asia would
necessarily lead to a major decline in the U.S. trade deficit with Asia. It is possible that
U.S. complaints of “currency manipulation” and pressure on one East Asian government
to alter its exchange rate policy may foster counter arguments from other East Asia
governments that have adopted similar exchange rate policies. This report will be
updated as events warrant.
The exchange rate policies of some East Asian nations — in particular, China Japan,
and South Korea — have been a source of trade tension with the United States for several
years. Some analysts and Members of Congress maintain that these countries are
intentionally keeping their domestic currencies undervalued in order to keep their exports
price competitive in global markets. Some argue that these exchange rate policies
constitute “currency manipulation” and violate Article IV, Section 1(iii) of the Articles
of Agreement the International Monetary Fund, that stipulate that “each member shall

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avoid manipulating exchange rates or the international monetary system in order to
prevent effective balance of payments adjustment or to gain an unfair competitive
advantage over other members.” Under U.S. law, the Secretary of the Treasury is required
to conduct a biannual analysis of the exchange rate policies of foreign countries and
determine if they violate Article IV, Section 1.1 In its report to Congress released in
December 2007, the U.S. Treasury “concluded that neither China nor any other major
trading partner of the United States met the requirements for designation under Section
3004 of the Act during the period”(i.e. none was manipulating its exchange rate).2
Several bills have been introduced during the 110th Congress concerning the issue
of “currency manipulation” in East Asia. These include the Currency Harmonization
Initiative Through Neutralizing Action Act of 2005 (H.R. 321), the Fair Currency Act of
2007 (H.R. 782 and S. 796), the Japan Currency Manipulation Act (H.R. 2886 and S.
1021), and the Currency Reform and Financial Markets Access Act of 2007 (S. 1677).
The economies of Asia have de facto adopted a variety of foreign exchange rate
policies.3 At one extreme, Hong Kong has maintained a “linked” exchange rate with the
U.S. dollar since 1983, under which the Hong Kong Monetary Authority (HKMA)
intervenes to keep the exchange rate between 7.75 and 7.85 Hong Kong dollars (HKD)
to the U.S. dollar.4 Such an arrangement is often referred to as a “fixed” or “pegged”
exchange rate. At the other extreme, Japan, the Philippines, and South Korea (up until
mid-March) have allowed their currencies to float freely in foreign exchange (forex)
markets over the last few years — an exchange rate arrangement often referred to as a
“free float.” However, all three nations — much like the United States — have intervened
in international currency markets if fluctuations in the exchange rate are considered too
volatile and pose a risk to the nation’s economic well-being.5
Most of the Asian economies have adopted a variety of exchange rate policies
commonly referred to as “managed floats.” Cambodia, China, Indonesia, Malaysia,
Singapore, Taiwan, Thailand, and Vietnam allow their currency to adjust in value in forex
markets so long as the fluctuations in value do not violate some other economic policy
goal (such as inflation limits or money supply constraints). In addition, some nations, such
as China and Vietnam, have adopted a type of managed float known as a “crawling peg”
— that typically includes either the gradual appreciation or depreciation of the currency
1 Section 3004 of the Omnibus Trade and Competitiveness Act of 1988 (P.L. 100-418), codified
into U.S. Code Chapter 22, Sections 5304-5306.
2 U.S. Treasury, “Report to Congress on International Economic and Exchange Rate Policies,”
December 2007, available online at [http://www.ustreas.gov/offices/international-affairs/
economic-exchange-rates/pdf/Dec2007-Report.pdf].
3 In some cases, there is a perceived discrepancy between the official (de jure) exchange rate
policy of an economy and the observed de facto exchange rate policy. This report will focus
primarily on the de facto exchange rate policies.
4 For more information about Hong Kong’s exchange rate policy, see the HKMA’s web page:
[http://www.info.gov.hk/hkma/eng/currency/link_ex/index.htm].
5 According to the Federal Reserve Bank in New York, the United States intervened in foreign
exchange markets twice between August 1995 and December 2006, for more information see:
[http://www.newyorkfed.org/aboutthefed/fedpoint/fed44.html].

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over time against one or more
currencies.6 Table 1 lists the current de
Table 1. De Facto Exchange
facto exchange rate policies of East
Rates Policies of East Asia
Asia according to four general
categories: 1. Pegged; 2. Crawling Peg;
3. Managed Float; and 4. Free Float.
Economy
Exchange Rate Policy
Cambodia
Managed Float
Categorization of a government’s
exchange rate policy can be
China
Crawling Peg
complicated if there is an intervention
Hong Kong
Pegged
on forex markets. For example, it has
been reported that the South Korean
Indonesia
Managed Float
government sold about $1 billion for
won on March 18, 2008, to stop a
Japan
Free Float
“disorderly decline” in the value of
Laos
Managed Float
Korea’s currency.7 There are also
reports that Korea sold more dollars for
Malaysia
Managed Float
won in early April.8 Some forex
Philippines
Free Float
analysts claim that the new South
Korean government has adopted a goal
Singapore
Managed Float
of holding the exchange rate between
the won and the U.S. dollar at 975-
South Korea
Free Float
1,000 to 1.9 However, according to
Taiwan
Managed Float
South Korea’s central bank, the Bank of
Korea, the nation’s exchange rate policy
Thailand
Managed Float
has been a “free floating system since
December 1997.10 Based on Korea’s
Vietnam
Crawling Peg*
past pattern, it is uncertain at this time if
Source: International Monetary Fund, De Facto
the recent actions are temporary
Classification of Exchange Rate Regimes and
Monetary Policy Framework, [http://www.imf.org/
interventions to stabilize markets, or
external/np/mfd/er/2006/eng/0706.htm].
indications of a categorical shift in
*Note: reflects policy change subsequent to release of
Korea’s exchange rate policy.11
the IMF report.
6 For more information about China’s exchange rate policies, see CRS Report RL32165, China’s
Currency: Economic Issues and Options for U.S. Trade Policy, by Wayne M. Morrison and Marc
Labonte.
7 Yoo Choonsik and Cheon Jong-woo, “S. Korea Sold Dollars to Calm Markets-Dealers,”
Reuters, March 18, 2008.
8 “Intervention Detected as S. Korea Won Pares Gains,” Reuters, April 4, 2008.
9 Yoo Choonsik, “S. Korea Won Hit by New Policy, Consumption at Risk,” Reuters, April 7,
2008.
10 See the Bank of Korea’s webpage for a description of its exchange rate policy:
[http://www.bok.or.kr/template/eng/html/index.jsp?tbl=tbl_FM0000000066_CA0000001186].
11 For more information on Korea’s recent forex market interventions, see CRS Report RL30566,
(continued...)

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In addition, there are indications that some of the economies of East Asia monitor
the region’s exchange rates and attempt to keep the relative value of their currencies in
line with the value of selected regional currencies. These “competitive” adjustments in
exchange rates are allegedly made so as to maintain the competitiveness of their exports
on global commodity markets. For example, one scholar maintains, “Countries that trade
with China and compete with China in exports to the third market are keen not to allow
too much appreciation of their own currencies vis-à-vis the Chinese RMB [renminbi].”12
Ito also speculates, “China most likely is more willing to accept RMB appreciation if
neighboring countries, in addition [South] Korea and Thailand, allow faster
appreciation.”13
Figure 1. Changes in U.S. Dollar Exchange Rates for East Asian
Currencies, July 2005 - February 2008
(base value = June 2005)
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
5
6
6
7
7
-0
-06
-0
-07
-0
-08
ly
r-05
y
ril-0
ly
r-06
y
ril-0
ly
r-07
y
Ju
ar
Ju
ar
Ju
ar
tobe
Ap
tobe
Ap
tobe
c
anu
c
anu
c
anu
O
J
O
J
O
J
Cambodia
China
Hong Kong
Indonesia
Japan
Laos
Malays ia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
Source: CRS calculations based on publicly available daily exchange rate data.
An examination of East Asian exchange rates over the last couple of years appears
to confirm both the general categorization of exchange rate policies, as well as the
supposition that some nations are engaged in competitive exchange rate management (see
Figure 1). The two currencies that appreciated the most — the free-floating Philippino
peso and the managed float Thai bhat — both rose about 23% in value between June 2005
11 (...continued)
South Korea-U.S. Economic Relations, by Mark E. Manyin.
12 Takatoshi Ito, “The Influence of the RMB on Exchange Rate Policy of Other Economies,”
paper presented at Peterson Institute for International Economics Conference, October 19, 2007.
13 Ibid.

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and March 2008, but moved somewhat independently throughout the period. A second
group consisting of the crawling peg Chinese renminbi and three managed float currencies
— the Laotian kip, the Malaysian ringit, and the Singaporean dollar — rose about 15%
in value and generally moved as group, especially since January 2007. A third group
which included the managed float currencies of Cambodia and Indonesia, and the free-
floating Japanese yen — appreciated about 5%, but moved separately. A final group,
which ended up relatively unchanged compared to the U.S. dollar, included the Hong
Kong dollar, the South Korean won, and the Vietnamese dong.
The pegged Hong Kong dollar remained virtually unchanged throughout the time
period considered, as would be expected. The three free-floating currencies — the
Japanese yen, the Korean won and the Philippino peso — followed three different but
fluctuating paths. In particular, the Japanese yen was the only East Asian currency that
significantly depreciated in value for much of the time period under consideration,
although it has appreciated significantly since July 2007.14 The remaining currencies —
which followed a managed float or crawling peg exchange rate — either exhibited a fairly
smooth rise in value or comparatively limited intertemporal variations. Two possible
exceptions are the Indonesian rupiah and the Thai bhat.
Figure 2. Currency Appreciation and U.S. Trade Growth with China,
Malaysia, and Singapore, 2006 and 2007
(percentage change from 2005)
60%
2006
50%
2007
40%
30%
20%
10%
0%
-10%
a
a
e
a
a
e
a
a
e
in
ysi
or
in
ysi
or
in
ysi
or
Ch
la
la
la
a
Ch
a
Ch
a
M
ngap
M
ngap
M
ngap
Si
Si
Si
Exchange Rate
U.S. Imports
U.S. Exports
Source: CRS calculation based on USITC data and publicly available exchange rates
In general, for the last two years, there has been little apparent correlation between
the growth of U.S. trade with East Asia and changes in the relative value of East Asian
currencies. The effectiveness of the apparent effort of China, Malaysia, and Singapore
to maintain their relative exchange rates unchanged is a complex issue beyond the scope
14 For more information about Japan’s exchange rate policies, see CRS Report RL33178, Japan’s
Currency Intervention: Policy Issues, by Dick K. Nanto.

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of this short paper.15 However, official U.S. trade data appear to indicate that economic
forces in addition to relative exchange rates are influencing U.S. trade with these three
nations (see Figure 2).16 Although their currencies appreciated against the U.S. dollar in
2006 and 2007 by roughly similar amounts, U.S. trade with China, Malaysia, and
Singapore grew or fell at different rates. U.S. trade with Malaysia showed the anticipated
rise in exports and slowdown or decline in imports with the appreciation of the ringgit in
2006 and 2007. However, both China and Singapore showed strong — and differing —
increases in both exports and imports despite the strengthening of their currencies.
Implications for U.S. Trade Policy in East Asia
While U.S. policy has generally supported the adoption of “free float” exchange rate
policies, most of the economies of East Asia consider a “managed float” exchange rate
policy more conducive to their overall economic goals and objectives. In part, East Asian
governments may be resistant to a “free float” policy because of the commonly held view
in Asia that the economies with more liberal exchange rate policies suffered more during
the 1997-1998 Asian financial crisis than the economies with pegged or managed
exchange rates.17 As a result, there may be skepticism about U.S. recommendations for
adoption of “free float” exchange rate policies.
It is uncertain if the adoption of “free float” exchange rate policies by more
economies in East Asia would significantly reduce the U.S. trade deficits with countries
in the region.18 Among economists, there is no consensus that the resulting appreciation
of East Asian currencies against the U.S. dollar would either significantly increase overall
U.S. exports or reduce U.S. imports. However, for some price-sensitive industries where
U.S. companies remain competitive, the appreciation of a competing nation’s currency
may stimulate U.S. export growth and/or a decline in U.S. imports.
15 In particular, this paper does not analyze the possible “J-curve” — an economic theory that the
value of a nation’s imports may actually rise for a short period of time following the depreciation
of its currency because the increase in the price of imports may outweigh the decline in the
quantity of imports.
16 These other forces may include the U.S. federal trade deficit, comparatively low U.S. interest
rates , and/or various tariff and non-tariff trade barriers. For more information, see CRS Report
RL31032, The U.S. Trade Deficit: Causes, Consequences, and Cures, by Craig K. Elwell.
17 For more about Asian views of the causes of Asian financial crisis of 1997-98, see Pradumna
B. Rana, “The East Asian Financial Crisis — Implications for Exchange Rate Management,”
Asian Development Bank, EDRC Briefing Notes, Number 5, October 1998; and Ramkishen S.
Rajan, “Asian Exchange Rate Regimes since the 1997-98 Crisis,” Singapore Centre for Applied
and Policy Economics, September 2006.
18 In his abstract of his recent study, “The Effect of Exchange Rate Changes on Trade in East
Asia,” Willem Thorbecke concluded, “The results indicate that exchange rate elasticities for trade
between Asia and the U.S. are not large enough to lend confidence that a depreciation of the
dollar would improve the U.S. trade balance with Asia.” Complete text of paper available at
[http://www.rieti.go.jp/en/publications/summary/06030003.html].

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